Stock pick: Canadian Pacific Railway (CP) just keeps on chugging

CP has risen 157% in two years—but that doesn’t necessarily mean you've missed all the gains

Chart showing trailing 12-month stock performance of Canadian Pacific Railway

There’s been no shortage of drama at Canadian Pacific Railway (TSX: CP) over the last few years, but the soap opera is finally over. These days, all investors want to watch are their returns rising and, so far, it’s been a good year for shareholders. The stock is up 19% since January and 157% since Hunter Harrison was hired as CEO, almost exactly two years ago, on June 29, 2012.

Steve Hansen, an analyst with Raymond James, thinks the company will continue to improve well past Harrison’s two-year anniversary. In a June 24 report titled “Here Comes the Growth,” Hansen pointed out that company’s transformation under its new CEO has been “nothing short of remarkable” and that it was able to deliver on its four year plan in just two years.

READ: Top Turnaround CEO of the Year: Hunter Harrison, Canadian Pacific Railway »

Some investors may think they’ve missed most of the gains, but Hansen disagrees. He sees “healthy upside” as the company moves away from its initial cost-cutting phase into more innovation and growth. “We expect management to aggressively pursue incremental high-margin business based upon the railroad’s new low-cost footprint, innovative new service offerings and a reinvigorated culture of success,” he wrote.

The company is benefiting and from growth in energy sector. Along with other rail companies, it’s shipping more crude, frac sand and grain and it’s doing more intermodal business — taking goods to another mode of transportation, such as ship or plane — than it has in the past. He thinks revenue per ton-miles could grow by 4% and 7% and annual pricing gains will increase between 2% and 4%.

Add in most cost-costing, a plan to monetize its real estate and a share repurchase program and you can see why Hansen thinks there’s more upside to come. He’s optimistic that the company can deliver mid-to-high single digit revenue growth over the next three years.

The stock is trading at the high end of its historical range, but its “industry leading earnings and free cash flow growth” make up for that higher multiple, he said The stock is currently trading at $191 a share, but Hansen said it will hit $220 over the next 12-months.