Canadian Pacific: Investor Day Reveals Solid Pipeline of Merger-Driven Revenue Synergies

Canadian Pacific CP held an investor day during which management provided incremental color around the rail’s long-term growth prospects following the Kansas City Southern merger, which creates nascent, seamless single-linehaul services from Canada and the upper Midwest down through Texas, the Gulf of Mexico, and into Mexico. Management called out an impressive multiyear revenue pipeline approaching USD 5 billion. Clearly, CP won’t secure all of that (we understand it has line of sight into about USD 1 billion), but the magnitude gives us incremental confidence in the firm’s revenue synergy goals for the newly combined networks (around USD 1.5 billion). Synergies reflect tangible opportunities to grab market share from competing rails and trucking (truck to rail conversions) and capitalize on a solid runway of industrial development projects, many of which should benefit from nearshoring trends to Mexico (automotive production, for example).

Management also established long-term targets (2024 to 2028), calling for high-single-digit average annual revenue growth, margin improvement via positive operating leverage and cost control, and double-digit adjusted EPS growth. For 2023, the firm expects mid-single-digit adjusted EPS growth, to about CAD 3.97; below FactSet consensus near CAD 4.20. Behind the revenue growth target, it looks like CP expects 6%-7% from baseline volume and pricing gains (ahead of our forecast), with another 2%-3% from KCS revenue synergies—we’ve been baking in roughly 2%. That said, 2023 EPS guide fell short of our forecast, perhaps due in part to incremental margin pressure from new supplemental wage agreements in the U.S.

Overall, we don’t expect to materially alter our USD 69 fair value estimate, except for a modest potential increase from the impact of foreign exchange on our USD fair value. We think CP has the strongest management team among Class-I rails, with significant growth opportunities, but the shares look slightly rich to us.