Canadian Pacific Kansas City Limited (CP): A Bull Case Theory

Core Thesis - Canadian Pacific Kansas City Limited (CPKC) is viewed positively due to its operational efficiency, steady earnings growth, and strong management, despite facing near-term volume challenges [1][4]. Financial Performance - CPKC reported Q3 2025 EPS of $1.10, slightly up from $1.09 year-over-year, with revenue increasing by 3% supported by 5% volume growth [2]. - The operating ratio improved by 220 basis points to 60.7%, even after accounting for a one-time derailment cost of 100 basis points [2]. - Management reaffirmed EPS growth guidance for 2025 at 10-14%, although Q4 volumes are down approximately 3% year-over-year [2][3]. Revenue Segments - The North American grain harvest, which contributes over 20% of CPKC's revenue, is expected to help mitigate the volume shortfall in the latter part of the year [3]. Shareholder Returns and Leverage - Over 90% of a 4% Normal Course Issuer Bid (NCIB) has been completed, indicating active shareholder returns, though net debt-to-EBITDA has increased to 3.2x [3]. - There is a noted trade-off between aggressive buybacks and maintaining balance sheet conservatism [3]. Market Position and Valuation - CPKC's valuation is considered elevated, with a preference for entry under a P/E of 20, ideally around the $90 range [4]. - The company is recognized for its long-term competitive advantages, credible management, and pricing power, but current volume headwinds suggest a cautious approach [4][5]. Investment Recommendation - The recommendation is to hold existing positions while waiting for a more attractive entry point for new investments, emphasizing the importance of acquiring the stock at the right price rather than at a premium valuation [5].