A major advantage of investing in the railroads is that their financial statements, for the most part, are straightforward and the overall business is easy to understand. Goods have to get from point A to point B, and freight companies charge transportations fees; larger volumes of transported materials correspond with greater top line growth. Unlike financial institutions such as Bank of America (NYSE:BAC), which heavily depend on a wide range of complex financial instruments for their operations. The railways, although typically involved in fuel hedging, have a much simpler business model.

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Growth for Canadian Pacific
Canadian Pacific (NYSE:CP) has been showing considerable growth over the past three years while maintaining a relatively stable asset base. Between 2008 and 2009, many business segments suffered as the global recession decreased shipping volumes, but activity has pushed forth with rebounding figures as "normal" levels of transportation resumed in 2010. Cumulative third quarter freight revenues surged by 13.1% for 2010 after falling 18.3% in 2009. Although, revenues are still slightly below 2008 levels, increased operating efficiency has allowed net income to surpass levels from two years ago.

Post- Recession Rebound
One of the most significant rebounds occurred in the automotive segment. In 2009, the number of CP carloads, as of the third quarter, decreased from over 111,000 to fewer than 72,000 but has since rebounded to 103,300. Over this time frame, however, revenue per carload steadily increased, providing another sign of improved efficiency. In the third quarter of 2010, the adjusted operating ratio, which compares operating expenses to net sales, also improved by 270 basis points compared to the same time last year.

The outlook for future activity also remains fairly strong. Canadian Pacific recently signed a 10-year agreement with Trek to transport coal, and management expects strong domestic demand in commodities such as potash. Coal transportation currently contributes 9.4% to the top line while sulfur and fertilizers contribute slightly less that 9%.

Other positive outlook signs come from adjacent industry of container leasing. Textainer Group Holdings (NYSE:TGH) projects strong demand from improved cargo volumes for the remainder of the year, as companies increase their asset base through a $500 million purchase of new containers. Despite that fact that Textainer focuses on providing intermodal containers to shipping fleets, a close relationship exists between shipping and railways volumes. Basically, goods shipped to a port must still be transported to their final destinations.

Valuation Basics
Based on several fundamental metrics, Canadian Pacific appears to be reasonably priced. It's EV/EBITDA of 8.61 multiple is somewhat below its competitors; Kansas City Southern (NYSE:KSU), for example trades with a ratio of 10.06 while CSX. Corp (NYSE:CSX) has an industry leading enterprise value to EBITDA multiple of 8.11. Valuations based on other common metrics such as the P/E and P/CF also suggest similar conclusions - CP is cheap relative to KSU but expensive compared to CSX.

Bottom Line
Canadian Pacific is a relatively stable and safe investment in the railroad industry. While there are numerous factors suggesting that future growth in the company appears promising, many of these conditions are specific to the overall transportation sector. Nonetheless, CP is fairly priced based on its trading multiples. (Is bigger always better? Read up on the important and often misunderstood concept of economies of scale. Check out What Are Economies Of Scale?)

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