CPKC's Growth Prospects Among Best In North American Rails, But High Valuation Premium Calls For Caution: Analyst

Credit Suisse analyst Ariel Rosa reiterated a Neutral rating on the shares of Canadian Pacific Kansas City Ltd CP and raised the price target from $81 to $87.

Last week, CP hosted its first investor day as a combined company and said it expects to achieve mid-single-digit EPS growth in 2023, with double-digit annual EPS growth over 2024-28.

It expects high-single-digit revenue growth aided by a range of initiatives, with a $5 billion opportunity pipeline from truck-to-rail conversions, expanded rail options for shippers, and new business opportunities from near-shoring and industrial development, noted the analyst.

The analyst added that with less than three months since the merger was completed, CPKC is experiencing ample early success with on-time performance and safety metrics.

The analyst commented that its large opportunity set and strong management team appear to be executing at a high level, with CEO Creel saying there's "no doubt" in his mind that CPKC would "exceed investor expectations".

While the analyst has high regard for CPKC management and believes the company almost certainly has the best growth prospects of all North American rails, its sizeable valuation premium at 27.2x current year EPS estimates is well above the U.S. rails average of 17.5x.

Also, CPKC must realize significant operating margin improvement over the next 3 years simply to be in-line with estimates, a much higher bar than peers, noted the analyst.

The analyst lowered 2023 and 2024 adjusted EPS estimates by 7% and 3% to C$4.10 and C$4.90, from C$4.40 and C$5.05, respectively, reflecting the soft macro environment and time needed to unlock synergies from the merger.

Price Action: CP shares are trading lower by 1.56% at $80.23 on the last check Wednesday.