Canadian Pacific Kansas City Ltd. (CP)

Executive Summary / Key Takeaways

• Canadian Pacific Kansas City (CPKC) leverages its unique tri-national rail network, connecting Canada, the U.S., and Mexico, to drive differentiated growth and create new trade flows amidst global economic uncertainties.
• The company delivered strong Q3 2025 results, with diluted EPS up 12% to $1.01 and a core adjusted operating ratio improving by 220 basis points to 60.70%, demonstrating operational efficiency and cost control.
• Strategic investments in infrastructure, technology, and partnerships, such as the enhanced Meridian Speedway and the Gemini alliance, are expanding market reach and enhancing service reliability.
• CPKC is actively pursuing shareholder returns through a 4% share buyback program, with 91% completed by Q3 2025, and a 20% increase in its quarterly dividend, targeting mid-teens EPS growth by 2026-2028.
• While facing risks from trade policy shifts and potential industry consolidation, CPKC's integrated network, technological edge, and proactive management position it for sustained outperformance and value creation.

The North American Rail Backbone: A Strategic Imperative

Canadian Pacific Kansas City Limited (CPKC) stands as a singular entity in the North American freight railway landscape, operating the only transcontinental network spanning Canada, the United States, and Mexico. This extensive network, covering approximately 20,000 miles, is not merely a collection of tracks but a strategic asset designed to capitalize on the evolving dynamics of global trade and supply chain security. The company's formation in April 2023, following the acquisition of Kansas City Southern (KCS), marked a historic milestone, fundamentally reshaping its competitive positioning and strategic capabilities.

CPKC's overarching strategy is to leverage this integrated network to become a "market maker," creating new trade flows and offering unparalleled single-line service solutions. This approach is particularly critical in an environment characterized by "consistent macro and trade policy headwinds" and "currency uncertainty." The company's historical journey, from its 1881 incorporation to its recent transformative merger, has instilled a deep-seated commitment to operational excellence and strategic adaptability. This foundation is crucial as CPKC navigates the complexities of a dynamic industry, focusing on areas within its control to drive profitable and sustainable growth.

Technological Edge and Operational Prowess

CPKC's operational efficiency and safety are underpinned by a continuous drive for technological differentiation and innovation. The company has made significant strides in integrating and enhancing its operating systems and infrastructure across the combined network. For instance, the completion of the second span of the Patrick J. Ottensmeyer International Rail Bridge in Laredo, Texas, substantially increased capacity at the U.S.-Mexican border, a critical gateway for North American trade. This investment, alongside eight new sidings and new infrastructure in Mexico in 2024, directly supports increased fluidity and efficiency across key corridors.

A core technological differentiator is CPKC's "cold wheel technology," which, when implemented in Canada, has identified "30% more defects than the standard tests." This capability significantly enhances safety by proactively detecting equipment issues, thereby reducing the risk of derailments. Similarly, the company's broken rail detection system has prevented "150 derailments since 2021," showcasing the tangible benefits of its safety-focused technology. These innovations contribute directly to operational reliability, reducing costly service interruptions and improving asset utilization.

Furthermore, CPKC is actively collaborating with the U.S. Federal Railroad Administration (FRA) on initiatives to streamline operations. These include removing "redundant air tests at the U.S.-Mexican border" and optimizing "bad order repairs," which drive yard efficiencies and reduce dwell times at critical locations like Kansas City and Laredo. The strategic deployment of 100 new Tier 4 locomotives in 2025 is also set to "support growth, improve reliability, and fuel efficiency," offering quantifiable improvements in operational performance. These technological and operational advancements are not merely incremental; they are foundational to CPKC's competitive moat, enabling lower operating costs, enhanced service quality, and a stronger market position.

Financial Performance and Liquidity Strength

CPKC has demonstrated robust financial performance, reflecting its strategic execution and operational effectiveness. In the third quarter of 2025, the company reported total revenues of $3.66 billion, a 3% increase year-over-year. Diluted earnings per share (EPS) rose by 12% to $1.01, while core adjusted diluted EPS increased by 11% to $1.10. The operating ratio saw a significant improvement of 260 basis points to 63.50%, with the core adjusted operating ratio reaching 60.70%, a 220 basis point improvement. This indicates strong cost control and operational leverage.

Freight revenues in Q3 2025 increased by 4% on a 5% rise in revenue ton-miles (RTMs), setting an all-time Q3 record for both metrics. This growth was broad-based, driven by higher volumes in Intermodal, Grain, Potash, Coal, and Automotive. While freight revenue per RTM decreased by 1% due to lower fuel prices and the elimination of the Canadian federal carbon tax, this was partially offset by higher freight rates and favorable foreign exchange impacts.

The company's liquidity remains strong, supported by cash and cash equivalents, a commercial paper program, and a revolving credit facility. Net cash provided by operating activities increased by $220 million in the first nine months of 2025. CPKC has been proactive in managing its capital structure, issuing several unsecured notes totaling over $3 billion in the first nine months of 2025. Furthermore, Moody's Investor Service upgraded the company's Long-term debt rating to Baa1 in Q1 2025, reflecting improved financial health.

A key strategic move in April 2025 was the divestiture of its 50% equity method investment in the Panama Canal Railway Company (PCRC) for U.S. $350 million, resulting in a pre-tax gain of U.S. $232 million ($333 million CAD). This non-core asset sale allows CPKC to focus on its primary three-nation network and redeploy capital for shareholder value. The company has also been aggressive in returning capital to shareholders, repurchasing 34 million shares (approximately 91% of its program) by the end of Q3 2025 and increasing its quarterly dividend by 20% in Q1 2025.

Strategic Initiatives and Growth Outlook

CPKC's strategic initiatives are deeply intertwined with its unique network and technological capabilities, aiming to unlock significant growth opportunities. The company is actively fostering new trade flows between Canada and Mexico, capitalizing on the "land bridge" concept. This includes increased shipments of refined fuels, LPGs, plastics, and grains from Canada to Mexico, as well as appliances, furniture, food products, finished vehicles, and auto parts moving north from Mexico. These initiatives are not merely reactive but are driven by proactive engagement with governments in both Canada and Mexico to "further incentivize growing Canada to Mexico trade volumes".

The Meridian Speedway, a critical east-west corridor, is being enhanced to offer a 30-hour transit time between Atlanta and Dallas by early 2026. This improvement is expected to provide "truck-like competitive" transit times, creating new market opportunities and strengthening CPKC's competitive position. Partnerships are also a cornerstone of CPKC's growth strategy. The company is exploring alliances with other Class I railroads, particularly Western and Eastern competitors to Union Pacific and Norfolk Southern , to create new markets and achieve "merger-like benefits without merger risks". The Southeast Mexico Express (SMX) service, launched with CSX in December 2024, is a prime example, connecting shippers between Mexico, Texas, and the U.S. Southeast with faster transit times and greater capacity.

Looking ahead, CPKC maintains its guidance of 10% to 14% earnings growth for 2025, underpinned by mid-single-digit volume growth. The company anticipates achieving a "sub-57% operating ratio" for Q4 2025 and expects positive cents per RTM in Q4. Management projects "mid-teens type of growth" in EPS for 2026-2028, driven by the benefits of share repurchases and a more supportive economic environment. The synergy pipeline remains robust, with an additional "$300 million of opportunity" expected in 2026. Furthermore, industrial development projects, including new facilities on CPKC's network, are expected to contribute over "$200 million" in new business by early 2026.

Competitive Landscape and Risks

CPKC operates within a highly competitive North American rail freight market, primarily contending with Canadian National Railway (CNR), Union Pacific , CSX Corporation (CSX), and Norfolk Southern Corporation . CPKC's unique tri-national network provides a distinct competitive advantage, particularly in cross-border logistics, offering streamlined supply chains that rivals cannot fully replicate. For instance, in intermodal, CPKC's "single-line service intermodal doesn't threaten my single-line service intermodal" from competitors, as CPKC's strength lies in its Canadian network and its Chicago-Mexico corridor. The Meridian Speedway further differentiates CPKC by offering a crucial second mainline alternative for traffic between Dallas and the Southeast U.S..

While CPKC's strategic adaptability and network integration are strengths, it faces vulnerabilities such as dependence on specific trade routes and exposure to economic fluctuations. The company's management, however, emphasizes its preparedness for market shifts, stating, "we're not planning for a recession, but we're always prepared for one".

A significant risk factor is the potential for further industry consolidation, specifically the proposed merger between Union Pacific (UNP) and Norfolk Southern (NSC). CPKC strongly believes such a merger is "not necessary at this time and is not in the best interest of the industry, the shippers or the U.S. economy". Management highlights the "unprecedented risk" of concentrating 40% of U.S. freight rail traffic in one entity, potentially leading to "anticompetitive behavior". CPKC is actively engaged in the regulatory process, advocating for "meaningful" conditions to "enhance competition" and mitigate downstream impacts, drawing on its own experience with past anticompetitive actions by competitors.

Other risks include ongoing litigation related to the Lac-Mégantic rail accident, a legal claim from Remington Development Corporation, and a 2014 Mexican tax assessment, though management believes their resolution will not have a material adverse effect. Fluctuations in foreign exchange rates and fuel prices also impact financial results, with specific sensitivities outlined by the company. However, CPKC's recent negotiation of four-year labor agreements with several Canadian unions provides a significant degree of labor stability, mitigating a key operational risk that impacted the industry in 2024.

Conclusion

Canadian Pacific Kansas City stands as a compelling investment proposition, uniquely positioned by its transcontinental rail network and a proactive management team. The company's ability to drive "differentiated, sustainable and profitable growth" by leveraging its integrated Canada-U.S.-Mexico footprint is a testament to its strategic vision and operational discipline. Despite facing macroeconomic headwinds, trade policy uncertainties, and the specter of further industry consolidation, CPKC has consistently delivered strong financial results, underscored by improved operating ratios and double-digit EPS growth.

The company's commitment to technological innovation, strategic partnerships, and disciplined capital allocation, including significant share repurchases and dividend increases, reinforces its long-term value creation potential. While competitive pressures and regulatory scrutiny remain pertinent, CPKC's robust network, operational efficiencies, and proactive engagement with stakeholders provide a strong foundation for continued outperformance. Investors should recognize CPKC's unique position as a critical enabler of North American trade, poised to unlock further value through its unparalleled connectivity and strategic agility.