Bill Ackman (Trades, Portfolio) has one of the best investing track records in the world. He is known for his activist approach. He buys the common stocks of public companies, and pushes for changes so that the market can realize the values of the companies. Ackman buys stocks trading at a discount, and sells when the companies reach their appraised value.
Canadian Pacific (CP, Financial) is one of his top holdings. As of December 31, 2014 he was holding 13,940,890 shares of the company. Canadian Pacific is a Class I Railroad company based in Canada. CP owns approximately 9,900 miles of track. An additional 3,800 miles of track are owned jointly, leased or operated under trackage rights. The following table shows revenue, EPS and other key metrics of the company over the last three years.
Source: Gurufocus Value Screens
The company has shown good growth in its earnings in the recent past and its EPS has more than doubled over the last few years. Last quarter, the company reported revenues of $1.8 billion which were up by almost 10% year over year. The company's operating ratio of 59.8 was the lowest in the company's history. The company posted adjusted net income of $460 million or $2.68 per share, a 40% increase versus the last year.
Canadian Pacific is showing strong improvements in its operating metrics. The company is posting improvements in safety, velocity, train length and fuel efficiency. Last quarter, the company saw a 19% reduction in train accidents versus the fourth quarter of 2013. If we look at annual data, year-over-year accidents were down 30%, an industry best-in-class performance. Velocity, another key ingredient of the company's service, was up 10% year over year in the fourth quarter. The company is also running longer, heavier and more fuel-efficient trains now.
The company is also doing a good job in terms of generating cash, improving its credit ratings and rewarding its shareholders. Last year, the company generated free cash flow of $725 million which is a 37% increase from the last year. This healthy performance on the cash flow front helped its credit metrics and the company's credit ratings improved two notches in 2014. The company also bought back 10.5 million shares over the course of 2014 at an average price of about $199 and distributed over $250 mn to shareholders through dividends.
Going forward, Canadian Pacific expects 7%-8% revenue growth in 2015. A lower Canadian dollar is expected to improve Canadian exports by making them more competitive. This will simulate the demand for the company's transport services. In addition, the company has two facilities coming online this year which will help its topline. The company's target is to reach $10 billion in revenues by 2018. Management also seems to be optimistic about the company's longer term prospects. Recently, Canadian Pacific's board of directors authorized the repurchase of up to 9.14 million of its common shares representing approximately 6 percent of Canadian Pacific's public float of common shares.
Canadian Pacific is trading at 16.92 time FY2015 EPS. Its EPS estimate for the current year is 10.96 and next year is 12.88. According to sell side estimates, the company's topline is expected to grow 7.80% in the current year and 9.10% next year. Out of 27 analysts covering the company 17 are positive and have buy ratings, nine have hold ratings and one has a sell rating. I believe the stock is a good buy given the company's solid execution, good growth prospects and reasonable valuations.
