Canadian Pacific (TSX:CP) Valuation in Focus After Earnings, Dividend Hike, and Buyback Completion

Canadian Pacific Kansas City (TSX:CP) delivered its third-quarter earnings, raised its dividend, and completed a major buyback. These actions give investors several key developments to digest this week. Earnings and net income posted year-over-year growth.

See our latest analysis for Canadian Pacific Kansas City.

The latest earnings and buyback news landed as the stock is working to recapture momentum, with its 90-day share price essentially flat and a year-to-date decline of nearly 5%. Over the last twelve months, total shareholder return slipped around 5%, though long-term stats still point to steady value creation since 2020. Overall, Canadian Pacific Kansas City has held up in a challenging year but investors are watching closely to see if recent moves will recharge growth.

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With shares trading nearly 19% below analyst price targets despite solid earnings growth and buybacks, investors are left wondering if Canadian Pacific Kansas City offers real value at today's price or if the market has already factored in its future gains.

Price-to-Earnings of 21.3x: Is it justified?

At its last close of CA$100.93, Canadian Pacific Kansas City is trading above both its estimated fair price-to-earnings ratio of 19.7x and the peer average of 20.8x. This suggests investors are paying a premium for the company relative to what the underlying earnings would traditionally support.

The price-to-earnings ratio (P/E) shows what the market is willing to pay today for $1 of current earnings. In sectors like transportation, the P/E can reflect how much growth investors expect and how stable those earnings are likely to be. In this case, the market is assigning a higher value, likely in anticipation of consistent growth or superior execution compared to other players.

While the current P/E sits above the peer average, it is below the North American Transportation industry average of 22.7x. However, the premium compared to its fair value ratio of 19.7x may indicate that investors are pricing in higher future performance than our models expect. If the market moves toward the fair ratio, that premium could narrow over time.

Explore the SWS fair ratio for Canadian Pacific Kansas City

Result: Price-to-Earnings of 21.3x (OVERVALUED)

However, a prolonged flat share price and underperformance against analyst expectations may challenge the outlook if recent momentum does not translate into sustained growth.

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

Another View: SWS DCF Model Shows Undervaluation

While price-to-earnings hints at a premium, our DCF model takes a different approach. It estimates Canadian Pacific Kansas City is trading nearly 19% below its fair value. This suggests the stock may be undervalued by the cash flow fundamentals. Could this disconnect present a hidden opportunity, or is there more to the story?

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 832 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’d like to interpret the latest results differently or prefer to conduct your own analysis, you can build a personalized view in just a few minutes with Do it your way.

A great starting point for your Canadian Pacific Kansas City research is our analysis highlighting 3 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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