A Valuation Snapshot of Canadian Pacific (TSX:CP) Following Strong Q3 Results and Share Buyback Completion

Canadian Pacific Kansas City (TSX:CP) just reported third-quarter results, showing both revenue and net income grew over the same period last year. The company also wrapped up a large share buyback program and reaffirmed its dividend.

See our latest analysis for Canadian Pacific Kansas City.

Even with strong quarterly results and a completed share repurchase, Canadian Pacific Kansas City's recent momentum has been mixed. Its share price is down 8.3% over the past month and 6.3% so far this year, contributing to a 7.2% total shareholder loss for the past twelve months. Its five-year total return still reflects meaningful long-term growth.

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With ongoing earnings growth, a hefty share buyback, and the stock trading at a discount to analyst targets, investors are left to wonder: Is Canadian Pacific Kansas City undervalued, or is the market already pricing in future gains?

Price-to-Earnings of 21x: Is it justified?

Canadian Pacific Kansas City is currently trading at a price-to-earnings (P/E) ratio of 21x, which offers a snapshot of how much investors are willing to pay for each dollar of company earnings at its last close of CA$99.47. This valuation is crucial, as it signals whether the market expects robust future growth or is pricing in risks.

The price-to-earnings ratio measures a company’s market value relative to its earnings and is a widely used tool for assessing whether a stock appears expensive or cheap. For a transportation giant such as Canadian Pacific Kansas City, whose profits are influenced by economic cycles and operational efficiency, the P/E ratio reveals investors' confidence in its consistent earnings power.

With the current P/E of 21x, Canadian Pacific Kansas City trades just in line with its peer average, suggesting the market sees it as fairly valued compared to direct competitors. However, it appears elevated compared to the estimated Fair Price-to-Earnings Ratio of 18.2x. This indicates that investors may be paying a premium relative to the company's underlying earnings potential. This gap could close over time if fundamentals catch up or sentiment shifts, so it is an important level to watch.

Explore the SWS fair ratio for Canadian Pacific Kansas City

Result: Price-to-Earnings of 21x (ABOUT RIGHT)

However, risks remain if earnings growth slows or if industry headwinds persist. These factors could challenge the stock’s current valuation and recent momentum.

Find out about the key risks to this Canadian Pacific Kansas City narrative.

Another View: SWS DCF Model Shows Undervaluation

Looking at the stock from another angle, the SWS DCF model suggests Canadian Pacific Kansas City could be undervalued. According to this approach, the current share price is trading roughly 23% below our estimate of fair value, which may indicate potential upside for investors. Could these two methods be painting very different pictures about the company's potential?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Canadian Pacific Kansas City for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 870 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Canadian Pacific Kansas City Narrative

If you see things differently or would like to investigate the numbers for yourself, you can craft your own view in just a few minutes. Do it your way

A great starting point for your Canadian Pacific Kansas City research is our analysis highlighting 4 key rewards and 2 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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