Canadian Pacific Railway

Canadian Pacific Kansas City's second-quarter revenue jumped 13% year over year on slightly higher carloads and strong all-in yield gains (surging fuel surcharges, positive core pricing). Adjusted consolidated margin fell, mostly due to fuel noise.

Why it matters: Carloads—excluding intermodal—flipped positive year over year (up 1%) on robust grain (favorable harvest), and stronger aggregates and automotive shipments, which benefited in part from new business wins. These factors were partly offset by lower coal (mine production) and tariff headwinds for certain Canada-US shipments. Intermodal activity fell 1% on tough import-pull-forward comps for international containers. That said, it sounds like domestic activity increased, with help from good service levels and new business wins—similar to what Canadian National reported. CPKC's adjusted operating ratio (expenses/revenue, excluding amortization) deteriorated to 61.6%, likely due to the mathematical impact of rapidly rising fuel costs and surcharges, coupled with wage inflation. That said, management still expects low-double-digit adjusted EPS growth this year, which suggests margins will improve materially in the second half.

The bottom line: We maintain our USD 74 fair value estimate for wide-moat CPKC, as our longer-term model forecast will likely remain intact. After rallying in first-half 2026 on rebounding domestic intermodal industry demand and hints of industrial sector recovery (including improvement in the ISM Manufacturing PMI), CPKC is modestly overvalued relative to our long-term model forecasts. Valuation aside, tariffs will pressure certain cross-border shipments near term, but CPKC's new business pipeline is healthy (including merger synergies), grain is strong, and we expect modest demand improvement among several industrial end markets this year—barring a tariff or oil shock-driven economic pullback. We model a midcycle OR of 56.5%-57.0%, excluding amortization.

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Following second-quarter results, we are raising our discounted cash flow-derived fair value estimate to USD 75 per share, from USD 74, due to a slight recalibration of our cost of capital assumptions. We translate our fair value estimate into US dollars using an exchange rate of CAD 1.40/USD 1.

Kansas City Southern was consolidated into CP's financials during the second quarter of 2023. Upon regulatory approval, CP officially took control of KCS in April 2023. Before that, KCS was in a voting trust during the STB review process and was accounted for via the equity method.

In 2023, CPKC's top line jumped more than 45% due to the addition of KCS. On a pro forma basis for the merger, revenue rose 5% thanks to new project development, initial KCS revenue synergies, and core pricing gains. In 2024, pro forma revenue grew 5% mostly driven by all-in yields. Yield rose 8% thanks to positive core pricing on merchandise business and as merger synergies provided longer length of haul shipment opportunities. Total traffic declined 3.5% due to a falloff in coal (low-priced natural gas) and customer diversions to US ports ahead of the August rail work stoppage and fourth-quarter ports strike. Excluding intermodal and coal, carload volume was up 1% on a better harvest for grain and a boost from merger-related revenue synergies, which ramped nicely. CPKC's adjusted OR (excluding merger costs but including deal amortization) improved to 63.7% from 64.4% on leverage from revenue growth, accretive core pricing on carload business, and network efficiency gains.

CPKC's consolidated revenue grew roughly 4% in 2025, mostly due to volume gains. Intermodal activity was up 8% thanks to easy comps and new single linehaul service options, including routes touching Mexico. Carload volume (excluding intermodal) came in flat as tariff headwinds for steel and forest shipments, along with soft demand from several industrial end markets, offset strength in coal and grain (favorable harvest). The OR improved to 62.4%, driven by incremental productivity gains and modest leverage from revenue growth.

This year, CPKC's volumes will see some pressure from sluggish housing end markets and direct tariff effects on metals and lumber, while international intermodal activity contends with tough import pull-forward comps. That said, assuming tariffs or an oil shock don't spark an economic pullback across North America, we expect the industrial sector to see modest improvement for carloads (along with CPKC's new business development tailwinds) and truck-to-rail conversions to prove favorable for domestic intermodal. We also expect improvement in intermodal contract pricing as rates rebound in the competing truckload sector, and CPKC should continue to see merger synergy tailwinds. Overall, we anticipate 7%-8% revenue growth in 2026 driven by spiking fuel surcharges, higher volumes (especially grain), and incremental core pricing gains on carload business. We look for slightly more modest revenue growth of 5%-6% in 2027, but that's due to tough comps for grain and fuel surcharges. Otherwise, we assume industrial end market demand and new business wins remain healthy.

We model OR improvement to 62.1% in 2026, on leverage from volume growth, incremental productivity progress, and core pricing gains ahead of cost inflation. We bake in progress to 59.6% in 2027 and 58.5%-59.0% in 2028 (56.5%-57.0% excluding deal amortization). We think it's reasonable to assume inflation-plus core pricing in the years ahead, partly because the rails are committed to it and shippers are well aware of rails' union contract wage hikes.

In our view, each of the North American Class I railroads we cover, including Canadian Pacific Kansas City, enjoys a wide economic moat driven by cost advantages and efficient scale. Core pricing and margin resilience in past freight recessions and in the face of substantial coal volume losses over the past decade-plus are a testament to the rails’ robust competitive positioning. With near certainty, we expect the rails to continue to leverage their two core moat sources into economic profit for the next 10 years and more likely than not 20 years from now.

Cost advantage is a key driver of CPKC's wide moat. While barges, ocean liners, aircraft, and trucks also haul freight, railroads are by far the low-cost option where no waterway connects the origin and destination, especially for freight with low value-per-unit weight (bulk commodities). Along those lines, railroads enjoy roughly quadruple the fuel efficiency of trucking (per ton-mile of freight), and through greater railcar capacity and train length, rails make more effective use of locomotive assets and manpower despite the need for train yard personnel. Rails can also carry significantly more freight at once. For freight that can be shipped by truck, we estimate railroads enjoy a 10%-30% discount on a similar lane (on average). Even for intermodal container freight, which is largely made up of consumer-related products, rail has historically been cheaper than its key competitor, truckload shipping, on average over the cycle, thanks to the rails’ aforementioned fuel efficiency and more economical use of labor.

Furthermore, route density plays a role in rails’ cost advantage relative to a would-be new railroad entrant in a given corridor. We don’t expect any new mainlines to be built in the future, but the incumbent Class I providers would enjoy vastly lower unit and marginal costs than an upstart, given immense network/lane density—the existing six North American Class I railroads have thousands of customers across myriad end markets and geographies that drive significant freight volume across their networks.

In addition to cost advantage, CPKC and its peers benefit from efficient scale. Would-be rational competitors have little incentive to enter because massive upfront infrastructure costs and the potential for creating excess capacity amid limited demand would preclude economic profit and destroy value. The network of tracks and assets that the North American Class I railroads have in place is essentially impossible to replicate. CPKC's network spans Canada from east to west, and following the KCS merger, it operates seamless single-linehaul services from Canada and the upper Midwest down through Texas, the Gulf of Mexico, and into Mexico. Railroads occasionally build new spurs and restore abandoned lines, but we don't expect any new mainlines to be built, given the massive entry barriers.

Efficient scale followed industry consolidation, escalated by the 1980 Staggers Act, which permitted extensive rail line sales, abandonment, and combination while allowing for private contracts and rate setting based on market demand. In 1980, more than 40 Class I rails operated across North America; today, there are only six. (By definition, a Class I rail generates at least USD 475 million of revenue.) Consequently, on all but the busiest lanes, a single railroad often serves an end-of-the-line shipper, only two railroads operate in most regions, and the rails have been able to reinvest while becoming quite profitable. In fact, we suspect that, absent government intervention, the rational number of competitors on the continent would be two, via additional consolidation. This is because in most regions, customers already have only two capable providers that service the market effectively and efficiently.

The Kansas City Southern merger, which creates new, seamless intermodal lanes, is yielding meaningful opportunities for incremental volume growth.

Intermodal shipping should enjoy favorable long-term trends, including secular constraints on truckload capacity expansion and shippers' efforts to minimize transportation costs through mode conversions (truck to rail).

CEO Keith Creel, who worked with legendary operator Hunter Harrison, has pushed to instill precision railroading principles in CPKC's culture.

US tariffs will temper carload demand for several commodity shipments like steel and aluminum this year.

Union contract wage and benefit inflation will remain a partial margin headwind over the near term.

The STB oversees railroads’ pricing in the US, so there will always be underlying risk of reregulation in terms of a policy shift to a more heavy-handed approach.