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Canadian Pacific Railway Ltd. (TSX:CP) announced yesterday that it is acquiring Kansas City Southern (KSU:US or NYSE: KSU) for US$ 29 billion, including US$ 3.8 million in debt. After this transaction, CP Rail will establish the first of its kind rail network connecting the US, Canada, and Mexico.
CP Rail is offering a 23 per cent premium on the current Kansas City share price of US$ 275, its previous closing price on March 19, 2021, representing US$ 90 in cash and 0.489 common share of CP rail for each piece.
The board of directors of both companies have given a green signal to this deal, which will generate US$ 8.7 billion and create approximately 20,000 jobs. The joint entity will be known as Canadian Pacific Kansas City. It will be headed by the incumbent CP Rail CP President and CEO Keith Creel.
Let us look at the Canadian railway stock’s performance in detail:
Canadian Pacific Railway Ltd. (TSX: CP)
The stock closed at C$ 474.27 on Friday, with a massive market capitalization of C$ 63.22 billion. It has a remarkable one-year growth of 70 per cent along with a dividend yield of 0.8 per cent.
The transportation stock recorded its 52-week high of C$ 482.74 per common share on January 11, this year. Once the above deal concludes, and railways resume operation with full capacity, the stock could hit an all-time high.
On March 23, 2020, it tumbled to C$ 261.46 per share, but now it has bounced back strongly with 81.40 per cent, outperforming the S&P TSX Railroads (Sub Industry) Index that has gained 13.12 per cent in one year.
CP Rail’s Kansas City acquisition is expected to improve its adjusted diluted earnings per share (EPS). Its current EPS is C$ 18.05 and the return on equity is 34.33 per cent.
Canadian Pacific Railway’s One-Year Stock Performance Chart. (Source: EODHD/Others)
In the fourth quarter of 2020, the company posted diluted EPS of C$ 5.95, a 23 per cent surge compared with C$ 4.82 in the fourth quarter of 2019. However, its revenues declined marginally by 1 per cent to C$ 7.71 billion in full-year 2020, against C$ 7.79 billion in 2019.
CP Rail’s Outlook For 2020
For its current year guidance, the large-cap industrial company expects capital expenditure of C$ 1.55 billion and estimates a double-digit EPS rise to C$ 17.67.
The company might update on the advance guidance in the upcoming earnings release on April 22, 2021, driven by the acquisition announcement.
The above constitutes a preliminary view and any interest in stocks should be evaluated further from an investment point of view.
