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Hold Strategy is Apt for Canadian Pacific Now: Here's Why

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We have issued an updated research report on Canadian Pacific Railway Limited (CP - Free Report) on Aug 20.

Despite high operating expenses, shares of the company have outperformed the industry in the past three months. The stock has gained 10.5% compared with the industry’s rise of 8.6%.

 

 

Reasons for Robust Price Performance

The Calgary, Canada-based company reported an earnings and revenue beat for the second quarter of 2018. In the quarter under review, earnings and revenues increased year over year, courtesy of higher shipments of key commodities. Freight revenues improved 7% year over year and accounted for 97.7% of the top line. In fact, the company expects strong freight demand to boost results for the upcoming quarters.

We are also impressed by the company’s efforts to reward shareholders through increased dividend payments and share buybacks. In May 2018, the company hiked quarterly dividend per share by 15.5% to C$0.65. The company is also active on the buyback front.

Moreover, the company currently has a trailing 12-month return on equity (ROE) of 27.9% compared with the industry’s 20.9%. This indicates growth potential and efficient utilization of shareholders’ funds.

Furthermore, we are optimistic about the ratification of the four-year agreement with the union, comprising conductors and locomotive engineers. Additionally, System Council No. 11 of the International Brotherhood of Electrical Workers also ratified a three-year agreement. The agreements are huge positives as satisfied labor forces generally lead to greater operational efficiency.

In the light of these factors, we believe that the stock should be retained by investors for now, despite headwinds like high costs and debt levels. The Zacks Rank #3 (Hold) carried by the stock seems to suggest the same.

Stocks to Consider

A few better-ranked stocks in the broader Transportation Sector are SkyWest, Inc. (SKYW - Free Report) , CSX Corporation (CSX - Free Report) and Old Dominion Freight Line, Inc. (ODFL - Free Report) . While Old Dominion carries a Zacks Rank #2 (Buy), SkyWest and CSX Corporation sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of SkyWest, CSX Corporation and Old Dominion have gained 10.2%, 34.1% and 6.8% in the last six months, respectively.

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