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.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

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.

Outlook
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?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!