Canadian Pacific (TSX:CP) Valuation Check After Stable Q3, Efficiency Gains and Ongoing Buybacks

Canadian Pacific Kansas City (TSX:CP) just delivered a steady Q3 update, tightening its operations while sticking with a 10 to 14% EPS growth outlook even as freight volumes soften.

See our latest analysis for Canadian Pacific Kansas City.

At around CA$101.95, the stock’s modest 1 month share price return of 2.49% sits against a slightly negative 1 year total shareholder return of 3.61%, hinting at stabilising sentiment after a softer year.

If CPKC’s mix of efficiency gains and disciplined growth has your attention, it could be a good moment to explore aerospace and defense stocks as another way to spot transport linked opportunities.

With earnings still forecast to grow double digits and the share price trading at a roughly mid teens discount to analyst targets, the key question is whether CPKC is quietly undervalued or whether the market already reflects its future growth.

Price to Earnings of 21.5x: Is It Justified?

On a price to earnings ratio of 21.5x, Canadian Pacific Kansas City trades slightly below both peers and the wider North American transportation sector, despite its recent share price softness.

The price to earnings multiple compares the current share price to the company’s earnings per share. This can be a useful lens for a mature, profit generating railway like CPKC where investors closely track earnings power rather than speculative revenue hopes.

Here, the market appears willing to pay a modest premium for a railway delivering 20.5% earnings growth over the past year, profit margins that have improved from 24.5% to 28.4%, and high quality earnings. That premium stays contained because forecasts point to more moderate earnings growth of about 6.8% per year and a return on equity expected to remain in the low double digits. This is broadly in line with an estimated fair price to earnings level of 22x that our model suggests the market could gravitate toward over time.

Compared with the Canadian transportation industry’s higher average valuation of 24.5x earnings, CPKC’s 21.5x multiple looks like a relative discount. It also edges below both the peer group and our own estimated fair price to earnings ratio of 22x, which reinforces the idea that investors are getting earnings exposure at a lower multiple than many comparable operators while still pricing in the company’s steadier growth outlook.

Explore the SWS fair ratio for Canadian Pacific Kansas City

Result: Price-to-Earnings of 21.5x (UNDERVALUED)

However, softer freight volumes or slower cross border trade integration could challenge double digit earnings expectations and limit how quickly the market re-rates CPKC’s shares.

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

Another View: What Does Our DCF Say?

While earnings multiples hint at a modest discount, our DCF model points to a deeper gap, with CPKC trading about 17.5% below an estimated fair value of roughly CA$123.64. Is the market underestimating long term cash flows, or simply pricing in execution and debt risk?

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 908 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 the numbers differently or simply want to dig into the assumptions yourself, you can build a personalised 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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