By Al Root and Teresa Rivas
After years of disappointment, Canadian Pacific Kansas City may be about to go from sidetracked to the fast track.
Railroads were once the artificial-intelligence stocks of their day. That era of overbuilding and volatility, which unfolded more than a century ago, is long gone. American railroads have evolved into leading industrial franchises that currently offer investors multiple catalysts to send their shares higher -- a welcome scenario, especially with AI fears mounting.
The best of the bunch looks to be Canadian Pacific. Investors climbing aboard can realize 20% gains for the coming few years, as it will benefit from merger synergies, a rebound in rail traffic, and a healthier industrial economy.
One of the so-called Big Six railroads on the continent, the Calgary, Alberta--based CP is a product of a 2023 merger between Canadian Pacific and Kansas City Southern. It operates a network that stretches across Canada and the Midwest and into Mexico. Among its many advantages are access to ports on the West and East Coasts and the Gulf of Mexico. Only one other railroad company, Canadian National Railway, has access to all three.
Each year, CP ships tens of millions of tons of grain, coal, fertilizer, cars, and a host of other goods that rely on intermodal transport -- the transport of goods using two or more different modes of transportation, such as ships, trucks, and rail.
Operating profit margins among the publicly traded players have essentially doubled over the past 20 years, producing double-digit earnings growth for a generation. CP's operating margins have risen to 37% in that span, one of the best in the group, along with Union Pacific. Unfortunately, that hasn't benefited investors recently, as a brutal three-year freight recession has pressured volumes across the logistics industry. Railcar loadings have stalled, operating profit has flatlined, and CP stock has gone almost nowhere.
Things are looking up, though. "Encouragingly, U.S. industrial indicators have begun to improve early this year, supporting a more optimistic outlook for CP and the broader rail industry," says Jake Seltz, a portfolio manager on the Empiric LT Equity team at Allspring Global Investments. Taking advantage of a cyclical recovery should yield a low-to-mid-teens earnings-per-share compound annual growth rate over the next five years, he estimates, driven by solid revenue growth, margin expansion, and a declining share count. Consensus calls for EPS to climb nearly 9% this year to $3.70, and more than 14% next year to $4.23.
Buying railroad stocks now is like "stacking call options," says Sam Klar, portfolio manager of the GMO Domestic Resilience exchange-traded fund -- meaning, in this instance, he sees multiple ways for rail stocks to work. Not all have to hit for rail stocks to be higher in the coming months.
Reindustrialization -- bringing more business back into the U.S. from overseas -- adds to railroad volumes. The U.S.'s two largest trading partners are Mexico and Canada, ahead of China, and that ongoing shift should allow CP to finally enjoy more synergies from the Kansas City Southern integration, yielding better long-term growth and margin expansion.
"We've been in a really weak macro environment since [the merger], so we haven't gotten to see its potential yet," says Janus Henderson research analyst William Brothers. "You'll start to see freight recover in 2026 and 2027 and...it's going to be harder for the market to ignore the power of the combination."
Even more could be in store. Large railroad mergers haven't been a thing for a generation, but Union Pacific is trying to merge with Norfolk Southern, and the Trump administration might let it happen, Klar says, given its tendency toward more regulatory leniency. That could set off a new round of consolidation and cost efficiencies for the industry.
Even without more dealmaking, CP and other railways will see a boost from oil prices, which are extremely unlikely to revert to pre-conflict levels even after any potential Iran war cease-fire. Railways in general tend to be as much as four times more efficient than trucks, and their ability to pass fuel-price inflation along to customers means energy costs will be only a temporary drag on earnings for a quarter or two.
Analysts expect CP's operating margins to expand from their current 37% to more than 40% this year and above 43% by 2028.
Railways also offer an antidote to AI fears. CP is the perfect example of a HALO -- heavy asset, low obsolescence -- business, as Goldman Sachs calls them, which are less impacted by tech disruption. Notes Brothers: "CP has this irreplaceable physical network, and that's not just capital in the ground, it's the right-of-ways. If you go to Chicago or Toronto, there's no way to build a new rail yard. CP's already there. The market is starting to...appreciate more the un-disruptable nature of some of these asset-intensive businesses."
All of that explains why it's a Wall Street favorite. Eighty-eight percent of analysts covering CP stock rate shares Buy. (The average Buy-rating ratio for stocks in the S&P 500 typically ranges from about 55% to 65%.) The average analyst price target is about $91, which works out to less than 22 times estimated 2027 earnings. At a typical premium to the S&P 500, shares could fetch 23 times, so investors are looking at a $95 stock in 12 months' time, supported by management's goal of achieving accelerating sales growth and double-digit EPS growth between 2025 and 2028.
CP trades at less than 21 times forward earnings, "representing only a modest premium to the S&P 500 relative to its historical average of more than 24 times -- an attractive entry point," says Seltz.
The biggest risk to Wall Street's rosy outlook is likely to be the renegotiation of the U.S-Canada-Mexico trade pact this summer. Any souring of trade relations could impact volumes for CP, but it's more likely to create uncertainty for investors, and investors hate uncertainty.
Oil prices that are elevated for longer could curb consumer consumption, but higher energy prices are a tailwind to railroads' intermodal business, which has consistently grown volumes despite the freight recession.
Of course, a sluggish economy from an oil price shock or any other reason would be a headwind, but there would still be synergies from the Kansas City deal.
Overall, CP shares sound like just the ticket.
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April 09, 2026 08:01 ET (12:01 GMT)
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