Monday, December 09, 2013

Investing in Railroad Earnings Growth

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With decent levels of growth both in the U.S. and abroad, many cyclical sectors have rebounded quite strongly in 2013, with transports leading the way in this regard. This shouldn’t be too surprising to many investors, as this important market segment has a history of leading stocks out of sluggish market environments, and this recent rally has been no different.

However, as stocks have stabilized in recent sessions, some investors might be looking to other sectors for the next round of gains. While this could be a good strategy overall, investors may not want to give up on all the transports just yet, as Canadian Pacific Railway (CP) may still be a great pick going forward.

CP in Focus

Canadian Pacific Railway operates a transcontinental railway across over 14,400 miles in North America. The system stretches from Vancouver in the Pacific to Montreal in the East, and then down into the Midwest region of the U.S. and key parts of the Northeastern United States as well.

This network and strong demand for the movement of goods has really helped CP perform well so far in 2013. The stock has added more than 43% YTD, and has soared by nearly 25% in the past three months alone, suggesting great momentum.

And while some investors might be put-off by this recent surge, the stock’s forward PE of 24 suggests that earnings have kept pace for the most part. Plus, current earnings estimate revisions have been moving significantly higher as of late, implying that analysts believe this story is getting even better.

Estimates in Focus

For the current quarter, nine estimates have gone up in the past 60 days compared to zero lower, while 14 have gone up for the current year compared to zero lower. These figures have also pumped up the consensus estimate by a solid margin too, with the current year seeing an increase of about 4.6% in the past two months.

This has also translated into an amazing level of expected growth for this railroad company, with current quarter figures coming in at just under 47% (yoy) earnings growth projected. Meanwhile, current year figures are also quite good from a projection standpoint—45.5% (yoy) growth is expected—while next year’s numbers look to come in with growth of close to 29%, meaning that this doesn’t look to just be a phenomenon that lasts for a couple quarters.

Clearly, CP is growing quite strong and analysts are feeling great about the company’s prospects in both the near and long term. Recognizing this, we have given CP a Zacks Rank #1 (Strong Buy) and are thus looking for more outperformance out of this company heading into 2014 as well.

Bottom Line

CP has some impressive stats and a great network across Canada and into some of the key parts of the U.S. rail market. Add this in to the strong industry position and investors could have a recipe for success.

This is especially true when you consider that the railroad industry is currently in the top 20 (out of roughly 260) industries from a Zacks Rank perspective. So make sure to climb aboard this freight train before more gains are had, as it doesn’t look like anything will be putting the brakes on this growth story any time soon.

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