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CP-KSU Deal Receives Positive Update From Regulatory Body

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Canadian Pacific Railway Company (CP - Free Report) , which inked a $31-billion deal (inclusive of the $3.8-billion outstanding debt) in September to acquire Kansas City Southern (KSU - Free Report) , received encouraging news from the U.S. Surface Transportation Board (STB). The STB while accepting the merger application, submitted jointly by CP and KSU on Oct 29, 2021, stated that the same was complete and included all the required information.

By agreeing to start reviewing the joint application, the STB dismissed claims made by some other railroad operators against the impending deal. The STB also disclosed a schedule for reviewing the application. The procedural schedule includes deadlines pertaining to various aspects like deadlines for comments, responsive applications and final briefs apart from other filings. Canadian Pacific and Kansas City Southern expect STB’s review to be completed in the final quarter of 2022.

Expressing delight at the STB’s decision to accept the joint merger application as complete, Patrick J. Ottensmeyer, president and chief executive officer of Kansas City Southern, said: "We have reached another important milestone and look forward to playing our part as the STB begins its formal review of the joint application for our historic combination with CP."

While the STB’s decision to accept the application for review is undoubtedly a positive, it by no way guarantees the CP-KSU merger to see the light of the day ultimately. In fact, any major merger in the railroad space has not been approved by the regulators for quite some time.

Currently, Canadian Pacific carries a Zacks Rank #3 (Hold) and Kansas City Southern, a Zacks Rank #4 (Sell).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

Investors interested in the broader Zacks Transportation  sector may consider stocks like Knight-Swift Transportation (KNX - Free Report) and Old Dominion Freight Line (ODFL - Free Report) .

Knight-Swift currently sports a Zacks Rank #1. KNX’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 14%. Shares of KNX have gained 39.5% so far this year.

Knight Swift is benefiting from an improved adjusted operating ratio (operating expenses as a % of revenues). The metric bettered to 82.8% in the first nine months of 2021 from 86.6% reported in the first nine months of 2020. This uptick in the adjusted operating ratio is primarily driven by higher revenues in the Trucking, Logistics and Intermodal segments. Lower the value of the metric, the better.

Old Dominion Freight Line carries a Zacks Rank #2 (Buy) at present. ODFL’s earnings trumped the Zacks Consensus Estimate in each of the trailing four quarters, the average being 5.2%. The stock has surged approximately 82% so far this year.

Driven by upbeat freight market conditions, the rise in LTL (Less-Than-Truckload) shipments is driving the top line at Old Dominion. In the first nine months of 2021, revenues from the LTL services segment increased 30.5% on a year-over-year basis. In the first nine months of 2021, LTL shipments and LTL revenue per shipment increased 19.5% and 9.2%, respectively. ODFL’s efforts to reward its shareholders through dividends and share buybacks are impressive as well.

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