Canadian Pacific Kansas City unveils plans for new rail network

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Canadian Pacific Kansas City Ltd. CP-N executives took the stage in Missouri before investors on Wednesday, outlining the railway’s plan to profit from its newly enlarged network.

At CPKC’s investors day – the first since the US$27-billion takeover of Kansas City Southern – chief executive officer Keith Creel said the railway that now extends deep into the United States and Mexico creates new opportunities for customers and the company.

The 32,000-kilometre railway will open new markets for agricultural shippers and automakers, removing trucks from the highway with the first single-line network that reaches ocean ports, industrial heartlands and consumer markets in three countries. Creel said in a Kansas City train station.

“You will see in our three nations’ history a network that will connect Canada, the US and Mexico again,” he said.

David Easton, CPKC’s director of business development for Mexico, said the railway is poised to capitalize on the trend of near-shoring – manufacturers that relocate overseas factories to the country to be closer to their end markets and meet the North American-made requirements of the free trade agreement with Canada and the US

Mexico’s young and low-cost work force has also helped attract several manufacturers located on CPKC’s network. Mr. Easton pointed to a list of companies that have moved production to Mexico from Europe, Asia and the United States, including Lego, John Deere and Bosch. Others include Tesla and BMW, which have announced massive plants to make electric cars. All are big shippers of raw materials and finished goods.

Another example is Barbie doll maker Mattel Inc., which opened a Mexican plant in 1994, but later moved much of its production to China. In 2022, however, Mattel reversed its course and launched a US$50-million expansion of its factory in Monterrey, Mexico, to cut shipping costs and be closer to its US consumers as the pandemic upended supply lines.

“We’re witnessing a pivot in global supply chains from Asia to Mexico,” Mr. Easton said, citing the war in Ukraine and tensions with China. “This has been going on for quite a few years, but the reality of COVID has supercharged the movement of companies to Mexico and the development of supply chain integration in North America. The pandemic forced us to de-risk supply chains.”

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CPKC issued 2023 and long-term financial guidance that missed analyst expectations, and the company’s share price fell. However, analysts said the forecasts did not diminish their belief that the acquisition would be profitable in the long run.

For this year, Calgary-based CPKC said it is expected to make $3.77 a share, on an adjusted basis, which is a gain of about 5 per cent. Between 2024 and 2028, CP forecasts compound annual growth in revenue of high single digits, and compound adjusted per-share profit growth in the double digits.

“We view these targets as weaker than expected at first glance,” Benoit Poirier, a stock analyst at Desjardins Securities, said in a note to clients. “We continue to believe the operational track record of CP’s experienced management team reduces integration risk and gives us confidence in CPKC’s ability to unlock shareholder value from the merger. However, the full benefits might take longer than initially expected.”

CPKC’s share price on Wednesday morning slipped by as much as 3 per cent on the Toronto Stock Exchange. The stock price closed at $104.72, down 1 per cent.

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