Canadian Pacific (TSX:CP): Assessing Valuation After Recent Share Price Pullback

Shares of Canadian Pacific Kansas City (TSX:CP) have come under some pressure recently, slipping nearly 2% on the day and losing about 9% over the past month. Investors are keeping a close eye on how broader freight trends and network performance could impact the outlook from this point forward.

See our latest analysis for Canadian Pacific Kansas City.

Despite the recent pullback, Canadian Pacific Kansas City’s one-year total shareholder return of -4.99% reflects a broader cooling in momentum, as the stock has lost ground since the start of this year. Still, over the long run, investors who stuck around for five years have seen a respectable 19% total return. This shows that while sentiment may be shifting in the near term, its historic growth story is not erased by one rough patch.

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With the stock now trading about 25% below typical analyst price targets, investors are left to wonder: Does this discount signal an undervalued opportunity, or is the market already pricing in all the future growth ahead?

Price-to-Earnings of 20.5x: Is it justified?

On a price-to-earnings basis, Canadian Pacific Kansas City trades at 20.5x its trailing earnings, just above its closest peer group and the benchmark for North American transportation companies. The last close price was CA$97.15, a number that influences where this multiple stands relative to industry norms and where the market could move.

The price-to-earnings (P/E) ratio captures how much investors are willing to pay today for a dollar of future earnings. For railroads and freight operators like CP, this multiple signals expectations for growth and profitability, often shaped by network efficiency and sector-wide demand trends.

While CP’s P/E sits below the industry average of 21.8x, it is marginally higher than the peer average of 20.4x and above its own estimated fair P/E of 18.3x. This implies the market is still granting a modest premium for future performance or unique business strengths, but there is a ceiling suggested by both peers and models. With CP’s recent pullback, this multiple could be a pivot point for value-oriented investors if earnings momentum slows or expectations shift.

Explore the SWS fair ratio for Canadian Pacific Kansas City

Result: Price-to-Earnings of 20.5x (ABOUT RIGHT)

However, ongoing softness in revenue growth or any further dip in network efficiency could put pressure on earnings. This may challenge the idea that the current valuation is justified.

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

Another View: Discounted Cash Flow Perspective

Looking at Canadian Pacific Kansas City through the lens of our DCF model, the stock appears to be trading at a significant discount. With shares around CA$97.15 and our fair value estimate at CA$130.25, this method suggests considerable upside. However, does relying on future cash flow projections provide a more reliable picture compared to market multiples?

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 900 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

Of course, if your perspective differs or you want to dig deeper into the numbers, you can craft your own analysis 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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