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Here's Why Investors Should Avoid Canadian Pacific KC (CP)

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Canadian Pacific Kansas City’s (CP - Free Report) financial stability is challenged by high operating expenses and low liquidity. Elevated fuel costs exacerbate the strain on the company's bottom line, while insufficient cash reserves impede its ability to meet obligations.

Let’s delve deeper.

Southward Earnings Estimate Revision: The Zacks Consensus Estimate for current-quarter earnings has been revised 2.70% downward over the past 60 days. For the current year, the consensus mark for earnings has moved 0.62% south in the same time frame. The unfavorable estimate revisions indicate brokers’ lack of confidence in the stock.

Weak Zacks Rank and Style Score: CP currently carries a Zacks Rank #4 (Sell). Moreover, the company’s current Value Score of F shows its  unattractiveness.

Unimpressive Price Performance: Canadian Pacific KC has declined 0.8% over the past 30 days against its sector’s 1.2% growth.

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Other Headwinds: CP is heavily leveraged. The company ended fourth-quarter 2023 with cash and equivalents of C$464 million, up from C$451 million in the fourth quarter of 2022. Long-term debt rose to C$19.35 billion from C$18.14 billion in the fourth quarter of 2022. In 2023, fuel expenses hiked 20%, driving operating costs up by 48.9%.

Moreover, its ambitious capital expenditures may impede its ability to generate free cash flow. In 2023, capital expenditure amounted to C$2.7 billion, and for 2024, management plans to increase this figure to C$2.75 billion.

Bearish Industry Rank: The industry to which CP belongs currently has a Zacks Industry Rank of 182 (250 plus groups). Such an unfavorable rank places it in the bottom 28% of Zacks Industries. Studies show that 50% of a stock price movement is directly related to the performance of the industry group it belongs to.

A mediocre stock within a strong group is likely to outclass a robust stock in a weak industry. Therefore, reckoning the industry’s performance becomes imperative.

Stocks to Consider

Investors interested in the broader Transportation sector may consider stocks like Air Lease (AL - Free Report) and SkyWest (SKYW - Free Report) .

AL has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 20.15%. AL currently carries Zacks Rank #2 (Buy). Continuous fleet growth and increased sales activity are boosting Air Lease's revenues.

The Zacks Consensus Estimate for 2024 earnings has been revised 25.80% upward over the past 60 days. The company has an expected earnings growth rate of 30% for 2024. Shares of AL have rallied 29% in the past year.

SKYW sports a Zacks Rank #1 (Strong Buy). SkyWest's fleet modernization efforts are commendable. The Zacks Consensus Estimate for SKYW’s 2024 earnings has improved 19.22% over the past 60 days. Shares of SkyWest have surged 206.9% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

SKYW has an expected earnings growth rate of more than 100% for 2024. The company delivered a trailing four-quarter earnings surprise of 128.02%, on average.


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