Michael Hakes - CFA, MBA Canadian Pacific Rail CP-T BUY May 09, 2025

Are hurt by the trade war; volumes will decline. CP is more exposed to cars crossing the US border. Buying KC was a great strategy. The rails have never been this cheap, so this will do well in 5 years. Just painful to hold now. A quality company with strong pricing power. 

Prefers CNR on valuation. Lots of embedded synergies after the KSU acquisition, and if they don't meet targets the high valuation makes it vulnerable (especially in this market).

Tariffs were an opportunity to buy at a discount. No alternative for Canadian commodities to get to the US. Next US House elections are in 18 months; if we start to see significant US pain from tariffs, they'll hit pause. Longer term, having a network to serve Canada/US/Mexico makes a ton of sense. Share buybacks and dividend increases. Buy and hold for a long time. Yield is 0.80%.

Things seem to be going well. The rails are such a bellwether on goods, manufacturing, and broader economy. Volume growth in mid-single digits in Q1, company says those volumes have accelerated in April and May. Noted strength in bulks (such as Canadian grain and fertilizer). Autos were steady, which is comforting. Cost and revenue synergies from the KSU integration. 

Company hopes that JV with shipping companies will drive more volume growth. His firm thinks there's more rerating potential in trucking, but this name is an outperformer through the cycles. 10-year total compound shareholder return of 11%, versus 9% for the TSX. High single-digit growth rate. Yield is ~2%.

Probably some good value here. If you have a long-term investment horizon, not the worst idea to have a 1-2% position in the Canadian rails and just leave it alone. Better run than CNR, with more attractive growth upside. Doesn't have a strong conviction either way right now on CNR versus CP.

Both are really good, monopoly-type businesses. On timing, don't do either right now. Tariff inflation hasn't happened yet, but it will. As that causes economic problems, it will affect the economically sensitive names. The NA economy is vulnerable right now.

That said, his preference is definitely CP. Now that it includes Mexico, its footprint is so unique. Growth profile gives them more upside on earnings, which provides a buffer during economic weakness. Both trade at less than 20x PE, but CP is more compelling, along with its phenomenal management team. An OK buy here, but be prepared to buy more if it does get hit. Perhaps buy 1/2 a position now, and then the other half later whether it goes up or down.

His firm switched from rails to trucking, a more cyclical and higher-torque way to get exposure to recovery in manufacturing and merchandising. Covid explosion in purchasing made for difficult comparisons later, so trucking experienced a 3-year "freight recession".

Still, there's no good reason to abandon the rails. They give you a good franchise and "forever" earnings power. Sector is largely an oligopoly. Those trains should still be rolling 100 years from now. 

Likes the railway sector. Oligopolies; infrastructure will never be rebuilt. Its acquisition of KSU will likely be the last acquisition in that area. Somewhat cyclical, but its transport of so many essential goods means it will always have underlying business. Decent pricing power, as rail is less expensive than trucking.

Stock pulled back on trade tariff concerns, as Mexico is a big route for them. Something will be ironed out. Attractive entry point, but see her Top Picks.

Rails are close to being monopolies. They're merging, and so there are fewer of them. The kind of stock that you just hold forever. Not a big dividend payer, but good capital allocators.

Cash-covered means that you have that money sitting and waiting to buy the stock if it goes down. Being a lower-volatility name, the options are not huge (but not bad). For $98, you can look out to November and sell the put for $2.65. That's almost 3%. If the stock drops, you're entering it about $7 net where stock's trading today. A good trade.