I. Executive Summary: The North-South Growth Thesis

The 2023 merger of Canadian Pacific (CP) and Kansas City Southern (KCS) created Canadian Pacific Kansas City Limited (CPKC), a company that fundamentally reshaped the North American logistics map. CPKC now operates as the first and only single-line railroad connecting Canada, the United States, and Mexico, a transformative development offering a unique investment thesis within the mature Class I rail industry.¹ The core proposition for investors over a three-to-five-year horizon is centered on the company’s unparalleled network, which provides a generational opportunity for volume and revenue growth by capitalizing on powerful secular trends, most notably the reshoring of supply chains to North America and the continued expansion of trade under the United States-Mexico-Canada Agreement (USMCA).

This report will argue that CPKC’s strategic value is rooted in its ability to offer new, more efficient single-line services that directly compete with the dominant trucking industry for long-haul, cross-border freight. The company’s foundation in the disciplined operational philosophy of Precision Scheduled Railroading (PSR) provides a credible framework for integrating the KCS network and extracting significant efficiencies. Management has guided to over $1 billion in annualized EBITDA synergies, driven primarily by new revenue opportunities that were previously unavailable to either predecessor railroad.³

However, this compelling growth narrative must be weighed against considerable risks. The integration of KCS is a complex operational and technological undertaking, and early performance metrics have shown signs of the associated challenges.⁵ To finance the approximately $31 billion transaction, the company has taken on substantial debt, significantly increasing its financial leverage.³ Furthermore, the railroad industry is inherently cyclical, and CPKC’s performance remains highly correlated with the health of the North American industrial economy, which faces uncertainty from evolving trade policies and potential macroeconomic slowdowns.⁶

Ultimately, the investment case for CPKC hinges on management’s ability to execute on its ambitious synergy targets and translate its unique network advantage into sustained, superior growth in volumes, earnings, and, most critically, Return on Invested Capital (ROIC). The significant dilution of this key value-creation metric post-merger presents the central challenge for management and the primary yardstick by which the transaction’s long-term success will be measured.

II. The North American Rail Oligopoly: An Enduring Economic Moat

To properly assess CPKC’s prospects, one must first understand the structure of the industry in which it operates. The North American Class I railroad industry is a classic oligopoly, a market structure that provides incumbents with significant pricing power and creates formidable barriers to entry, underpinning the sector’s long-term profitability and economic moat.

Industry Structure & Competitive Dynamics

The North American freight rail market is dominated by six large, publicly traded companies known as Class I railroads: BNSF Railway (a subsidiary of Berkshire Hathaway) and Union Pacific (UP) in the west; CSX Transportation and Norfolk Southern (NS) in the east; and the two Canadian-based transcontinental carriers, Canadian National (CN) and CPKC. Together, these six entities account for the vast majority of the industry’s activity, operating approximately 67% of the freight rail mileage and generating 94% of the industry’s revenue.⁸

The primary barrier to entry is the immense capital investment required to build and maintain a rail network. The U.S. network alone comprises nearly 140,000 route miles of track, bridges, tunnels, and terminals—an asset base that is practically impossible to replicate.⁹ Class I railroads collectively invest enormous sums annually to maintain this infrastructure, averaging over $23 billion per year over the last five years, which represents about 18% of revenue—a capital intensity six times that of the average U.S. manufacturer.⁸ This high fixed-cost structure creates a rational competitive environment where carriers are incentivized to focus on network efficiency and maximizing return on assets, rather than engaging in value-destroying price wars.

The industry’s structure is heavily influenced by its primary regulator, the U.S. Surface Transportation Board (STB). The STB holds exclusive jurisdiction over railroad mergers, line construction, and certain rate and service disputes, acting as a crucial gatekeeper for industry consolidation and competition.¹¹ The STB’s recent actions demonstrate its active role in shaping the competitive landscape. For instance, in July 2025, the Board enforced a condition from a 1988 merger to ensure CPKC could maintain competitive access for grain traffic to the Gulf Coast.¹³ Concurrently, the STB has initiated a formal review process for a proposed merger between Union Pacific and Norfolk Southern, a move that signals a potential new era of consolidation.¹⁴

Freight Market & Economic Linkages (2024-2025)

Rail traffic serves as a real-time barometer of the North American industrial economy. Recent trends in 2024 and early 2025 paint a picture of a bifurcated market, with strength in consumer-driven segments offsetting weakness in industrial sectors.

U.S. rail volumes in early 2025 showed robust growth in intermodal traffic, which primarily consists of shipping containers and truck trailers carrying consumer goods. Total intermodal volume rose 8.5% in the first two months of 2025 compared to the prior year, driven by strong consumer spending and a rebound in import volumes through West Coast ports.¹⁶ This strength, however, was contrasted by persistent weakness in carload traffic (non-intermodal freight), which fell 2.0% over the same period. This decline reflects an ongoing slump in the U.S. manufacturing sector, which has struggled with weak demand and competitive pressures for over two years.¹⁷

A significant structural headwind for the industry is the secular decline of coal, historically a foundational and highly profitable commodity for railroads. In 2024, U.S. coal shipments fell by 13.6% to a record low, though the commodity still accounted for more than a quarter of all carloads.¹⁶ The U.S. Energy Information Administration (EIA) forecasts that U.S. coal production will continue its decline, falling from 512 million short tons in 2024 to 467 million in 2026, as coal-fired power plants are retired in favor of natural gas and renewables.¹⁸ While the International Energy Agency (IEA) projects global coal demand will remain on a plateau through 2026, the long-term outlook for North American coal consumption is unambiguously negative.¹⁹ This structural decline necessitates that railroads find new sources of volume growth to offset the loss of high-density coal traffic.

The Shifting Competitive Landscape

The regulatory environment, which had been stable for two decades, may be entering a period of significant change. The STB’s approval of the CPKC merger in 2023 was the first major Class I combination since the 1990s and was largely seen as a unique case. Because the CP and KCS networks were almost entirely end-to-end, with a single point of connection in Kansas City, the merger created new single-line routes and enhanced competition without reducing the number of railroad options for most shippers.²¹ It preserved the six-carrier structure of the industry.

However, the STB’s decision in July 2025 to formally accept a “Notice of Intent” for a proposed merger between Union Pacific and Norfolk Southern represents a potentially pivotal development.¹⁴ While this is merely the first step in a long and arduous regulatory process, it signals that the Board is not summarily dismissing the possibility of further, more complex consolidation. The rationale put forth by UP and NS mirrors some of the pro-competitive arguments made by CPKC: that a combination is necessary to create a more efficient U.S. supply chain and to compete more effectively with the Canadian-based railways and the trucking industry.²²

This potential for a final wave of consolidation, which could reduce the number of major players from six to as few as four, presents both a significant long-term threat and a medium-term opportunity for CPKC. A combined UP/NS would create a competitor of immense scale and network reach, potentially marginalizing the smaller CPKC. Conversely, the regulatory review for such a complex merger would likely take years and consume a vast amount of management attention and resources at its two largest rivals. This period of distraction could provide CPKC with a crucial window to focus exclusively on integrating KCS, solidifying its new service offerings, and capturing market share while its primary competitors are preoccupied with regulatory and integration challenges of their own.

III. CPKC’s Strategic Position: The Transcontinental Network Advantage

The creation of CPKC through the acquisition of Kansas City Southern has endowed the company with a unique and competitively advantaged network. While it remains the smallest Class I railroad by revenue, its strategic footprint is now arguably the most compelling in the industry, positioned to capitalize on the reorientation of North American supply chains.

The Unrivaled Network

The post-merger CPKC operates an approximately 20,000-mile rail network that is the first and only single-line system connecting Canada, the U.S., and Mexico.² This seamless network provides customers with unparalleled access to major ports on three coasts: the Pacific via Vancouver, the Atlantic via Saint John, the U.S. Gulf Coast via multiple ports, and Mexico’s Pacific and Gulf coasts, including the deep-water port of Lázaro Cárdenas.¹

Despite this unique geographic reach, CPKC remains the smallest of the six Class I railroads. For the full year 2024, the combined company generated revenues of C$14.5 billion.²⁴ For comparison, Union Pacific’s 2024 revenue was $24.3 billion.²⁵ However, early results suggest the merger is driving top-line growth. In the first quarter of 2025, CPKC was among the carriers with the highest revenue growth, although this was attributed more to increased revenue per unit (a function of price and mix) than to a significant increase in traffic volumes.⁵ This suggests an initial focus on integrating operations and establishing pricing for new, premium single-line services. The core investment thesis for CPKC is not predicated on being the largest carrier, but on being the most strategically positioned to capture new, high-growth, north-south trade flows that were previously inaccessible to either legacy railroad.

Market Position & Competitive Threats

The primary competitive threat to the entire rail industry, and to CPKC’s growth strategy in particular, is the trucking industry. By value, trucking is the undisputed dominant mode of freight transportation in North America. In 2024, trucks carried 64.4% of the value of merchandise trade between the U.S. and its NAFTA partners, Canada and Mexico. Rail’s share was just 12.7%.²⁶

Rail’s fundamental competitive advantage against trucking is rooted in its superior fuel and labor efficiency, especially over long distances. A freight train is capable of moving one ton of goods approximately 470 miles on a single gallon of fuel, making it nearly four times more fuel-efficient than a truck.²⁷ A single train can also replace several hundred trucks on the highway, offering significant labor cost savings and environmental benefits.³ This cost advantage becomes more pronounced as the length of haul increases and during periods of high diesel fuel prices. A 2008 study, for example, found a statistically significant positive correlation between diesel prices and rail’s market share, suggesting that as fuel costs rise, some freight shifts from truck to rail.²⁸

CPKC’s strategy is explicitly designed to exploit this advantage. The creation of new single-line routes, such as from the U.S. Midwest to industrial centers in Mexico, directly targets long-haul freight that currently moves via truck. The success of this modal conversion strategy will be highly dependent on two factors: maintaining a significant cost advantage over trucking and, crucially, providing a level of service reliability and speed that is competitive with truck transit times.

Redefining the Intermodal Value Proposition

The most profound long-term strategic value of the CPKC network lies in its potential to fundamentally alter the economics and service proposition of North American intermodal transportation. By creating a seamless, single-line network, CPKC can offer a service that is not just incrementally better, but qualitatively different from what was previously available.

Historically, moving an intermodal container from, for example, Mexico to Canada was a complex logistical exercise. The container would start on the KCS network in Mexico, be brought to a border point like Laredo, Texas, and then be interchanged—physically lifted off one train and placed onto another—to a U.S. railroad like Union Pacific or BNSF. If its final destination was in Canada, it would likely undergo a second interchange in a congested hub like Chicago onto either CN or the legacy CP network. Each of these interchanges adds significant time, cost, and complexity. It introduces terminal dwell, administrative friction, and a point of potential service failure or delay. This cumulative inefficiency erodes rail’s inherent cost advantage and makes it uncompetitive for all but the least time-sensitive freight, ceding the vast majority of the market to long-haul trucking.

CPKC’s single-line service eliminates these friction points.²³ A container can now be loaded onto a CPKC train in Monterrey, Mexico, and not be handled again until it reaches its final destination in Chicago, Toronto, or Calgary. This streamlined approach directly attacks the primary advantages of trucking: speed and simplicity. The company’s flagship “Mexico Midwest Express (MMX)” service, which offers dedicated intermodal trains between the U.S. Midwest and Mexico, is the prime example of this strategy in action.²³ This service is not merely about competing for existing rail traffic; it is about expanding the total addressable market for rail freight by capturing a portion of the tens of thousands of truckloads that cross the U.S.-Mexico border every day because traditional multi-line rail service was too slow, too costly, or too unreliable. This potential for modal conversion is the foundational pillar of the merger’s revenue synergy case and the company’s long-term growth story.

IV. The PSR Engine: A Foundation of Operational Excellence

The operational philosophy of Precision Scheduled Railroading (PSR) is the engine that drives CPKC’s efficiency and profitability. This disciplined approach to running a railroad, deeply embedded in the company’s culture, provides the framework for integrating the KCS network and is critical to achieving the financial goals of the merger.

PSR Implementation & Impact

PSR, an operating model pioneered by the late railroad executive Hunter Harrison, represents a fundamental shift in railroad operations. It moves away from a traditional “hub-and-spoke” model, which focuses on building long trains before dispatching them, to a model that prioritizes the continuous movement of individual railcars on a fixed, predetermined schedule, much like a passenger railway.³⁰ CPKC’s management team, led by CEO Keith Creel, who was a key lieutenant to Harrison, is deeply committed to the PSR philosophy. The company defines its approach through five core foundations: improving customer service, controlling costs, optimizing asset utilization, operating safely, and developing employees.³²

The impact of PSR on the legacy Canadian Pacific network was transformative and is well-documented. In a 2016 white paper, the company detailed the dramatic, quantifiable improvements achieved in the years following PSR’s implementation around 2012. From 2011 to 2015, key operational metrics were revolutionized:

• Network Speed: Improved by 40%.³³
• Train Length: Increased by 19%.³³
• Terminal Dwell: The time a railcar spends idle in a terminal was reduced by 19%.³³
• Locomotive Productivity: Increased by 40%, allowing the railroad to move more freight with 700 fewer locomotives.³³

These operational improvements translated directly into superior financial performance. The most widely followed metric of railroad efficiency is the operating ratio (OR), which measures operating expenses as a percentage of revenue. A lower OR signifies greater efficiency. CP’s adjusted OR fell dramatically from 81% in 2011 to an industry-leading 61% by 2015.³³ This efficiency drove a virtuous cycle: improved asset utilization led to lower costs and higher margins, which in turn generated strong free cash flow for reinvestment and shareholder returns. The key challenge for CPKC is to replicate this success by applying the PSR playbook to the legacy KCS network, a process that is now well underway.

Peer Benchmarking

The integration of two massive rail networks is a complex undertaking, and initial operational metrics reflected these challenges. In the first quarter of 2025, a comparative analysis showed that CPKC’s key service metrics—average terminal dwell and average train speed—had deteriorated compared to the prior year. This stood in contrast to peers like Norfolk Southern and BNSF, which both registered service improvements during the same period.⁵ Management attributed this temporary decline to the complexities of integrating disparate operating systems and processes, particularly in the southern U.S. portion of the network.³⁴

However, by the second quarter of 2025, the company reported significant progress in applying the PSR model to the new assets. Management highlighted a dramatic turnaround on the legacy KCS network in the U.S. during the final two months of the quarter, with terminal dwell time improving by 42% and car miles per car day (a measure of asset velocity) improving by 38%.³⁵ The company’s consolidated Core Adjusted Operating Ratio for Q2 2025 improved by 110 basis points year-over-year to 60.7%.³⁴

This rapid improvement suggests that while the integration process is not without its hurdles, the PSR model is being successfully deployed and is beginning to yield the expected efficiency gains on the acquired assets. For investors, the continued monitoring of key performance indicators such as train speed, terminal dwell, and locomotive productivity will serve as critical leading indicators of the merger’s operational success.

---

Table 1: Class I Peer Comparison – Key Operating & Financial Metrics (TTM as of Q2 2025)

Metric	CPKC	CN	UP	CSX	NS
Revenues (USD Billions)	$10.9	$12.3	$24.2	$14.4	$12.0
Core Adj. Operating Ratio	60.7%	61.6%	60.7%	62.9%	66.4%
EBITDA Margin	47.6%	48.2%	49.5%	46.5%	42.1%
Net Income (USD Billions)	$3.0	$3.6	$6.7	$3.4	$2.5
Diluted EPS (USD)	$3.21	$5.54	$11.20	$1.78	$10.95
ROIC (Normalized)	6.9%	13.1%	15.8%	11.9%	11.6%
Net Debt / EBITDA	3.0x	2.1x	2.9x	2.5x	2.8x
Avg. Train Speed (mph)	18.8	19.5	24.1	19.9	22.5
Avg. Terminal Dwell (hrs)	9.8	11.2	22.5	24.3	25.1
Note: Data is compiled and estimated from various sources including company filings and industry reports for the trailing twelve months ending Q2 2025. BNSF is excluded as it is a privately held subsidiary. Metrics are adjusted for comparability where possible, but definitions may vary slightly by carrier. Sources:.5

---

V. The KCS Combination: A Generational Growth Catalyst

The merger with Kansas City Southern is the central pillar of CPKC’s long-term strategy, transforming it from a predominantly east-west Canadian railroad into a north-south transcontinental powerhouse. This section provides a detailed analysis of the merger’s financial targets, the secular growth opportunities it unlocks, and the resulting improvement in the company’s business diversification.

Synergy Realization

The financial rationale for the merger is underpinned by a target of achieving approximately $1 billion in annualized EBITDA synergies within three years of gaining operational control (which occurred in April 2023).³ An investor presentation from November 2021 provided a specific breakdown of this target:

• $820 million in Revenue & Market Synergies: This constitutes the vast majority of the expected value creation. It is projected to come from new market opportunities, expanded single-line haul routes, and the ability to attract freight from competitors (primarily trucks) onto the newly integrated network.⁴
• $180 million in Cost & Efficiency Synergies: This portion is expected from sources such as improved fuel efficiency, reduced equipment rents, and the consolidation of facilities, IT systems, and general and administrative functions.⁴

It is worth noting that some subsequent analyst reports have cited a higher figure of $1.5 billion in annual cost savings by 2026.³⁶ However, this analysis will focus on the more conservative, company-provided guidance of $1 billion in total EBITDA synergies.

Execution against these targets appears to be progressing well. During the company’s Q4 2024 earnings conference call, management stated that they were “ahead of synergy capture targets.” They reported closing 2024 with a synergy run-rate in excess of $800 million and projected adding another $300 million in 2025, which would put them on track to exceed the original $1 billion target ahead of schedule.²⁹ The emphasis on revenue synergies is a crucial distinction. Unlike one-time cost reductions, revenue synergies represent sustainable, profitable growth that leverages the strategic value of the combined network, making them inherently more valuable to long-term investors.

---

Table 2: KCS Merger Synergy Tracker

Synergy Category	Initial 3-Year Target	Timeline	Reported Progress	Key Initiatives & Examples
Revenue Synergies	~$820 Million	2023 – 2026	On track / Ahead of schedule	– Intermodal: Mexico Midwest Express (MMX) service, Gemini Alliance, new refrigerated container fleet. – Automotive: New closed-loop services for OEMs, GM Supplier of the Year award. – Bulk/Merchandise: New single-line routes for grain, plastics, and refined products.
Cost Synergies	~$180 Million	2023 – 2026	On track / Ahead of schedule	– Fuel Efficiency: Longer, heavier trains, reduced idling. – Asset Utilization: Network optimization, reduced equipment rents. – G&A/IT: Consolidation of corporate functions and systems.
Total EBITDA Synergies	~$1.0 Billion	2023 – 2026	>$800M run-rate at YE 2024; project +$300M in 2025	Total synergy capture is progressing ahead of the initial plan.
Source: Compiled from company presentations, earnings calls, and press releases..4

---

Secular Growth Opportunities

The KCS merger strategically positions CPKC to be a primary beneficiary of the secular trend of “nearshoring,” whereby North American companies are relocating manufacturing and sourcing from Asia to Mexico. This shift is driven by a desire to shorten supply chains, reduce geopolitical risk, and leverage the benefits of the USMCA trade agreement.⁴⁶

CPKC is not merely a passive beneficiary of this trend; it is an active enabler. The company is making significant capital investments to facilitate the expected growth in cross-border traffic. The most critical of these is the completion in December 2024 of a second span for the international railway bridge at the Laredo, Texas gateway. This project, which more than doubles the capacity at North America’s busiest rail border crossing, is a direct investment in unlocking the potential of the combined network.²³

The company is aggressively launching new services to capture this freight. The Mexico Midwest Express (MMX) intermodal service is a prime example, offering the first single-line rail option for refrigerated shippers moving goods like produce and proteins between the U.S. Midwest and Mexico—a market currently dominated almost entirely by trucks.²³ To support this initiative, CPKC has more than doubled its fleet of 53-foot refrigerated intermodal containers.²³ In partnership with cold storage provider Americold, CPKC is building a new import-export hub at its Kansas City intermodal facility, slated to open in mid-2025, to further anchor this temperature-sensitive supply chain.²³ These actions demonstrate a clear strategy to provide a compelling rail alternative in high-value markets, creating a self-reinforcing growth loop where improved logistics solutions make nearshoring to Mexico an even more attractive proposition for businesses.

Revenue Quality & Diversification

The merger has fundamentally improved the quality and diversification of CPKC’s revenue base. Prior to the transaction, Canadian Pacific was heavily exposed to the cyclicality of Canadian bulk commodities, particularly grain and potash, which are subject to harvest cycles and global commodity prices. The KCS network, with its north-south orientation, brings a complementary book of business with significant exposure to cross-border intermodal, the automotive supply chain, and refined petroleum products.

This diversification is evident in the combined company’s revenue profile. In the first quarter of 2025, no single commodity group accounted for more than 21% of freight revenue. The business is now balanced across Bulk (35%), Merchandise (47%), and Intermodal (18%).⁶ This more diversified portfolio reduces the company’s reliance on any one sector of the economy, making its earnings stream more resilient and less volatile over the course of a business cycle. The increased exposure to structurally growing end markets like cross-border intermodal and automotive provides a powerful long-term tailwind to help offset the secular decline in coal volumes.

---

Table 3: CPKC Revenue Breakdown by Commodity (Q1 2025)

Commodity Group	Freight Revenue (C$ Millions)	% of Total Freight Revenue
Grain	$788	21.1%
Energy, Chemicals & Plastics	$758	20.3%
Intermodal	$674	18.1%
Metals, Minerals & Consumer	$448	12.0%
Automotive	$315	8.5%
Coal	$257	6.9%
Forest Products	$217	5.8%
Potash	$156	4.2%
Fertilizers & Sulphur	$114	3.1%
Total Freight Revenue	$3,727	100.0%
Source: CPKC Q1 2025 Earnings Release.6

---

VI. Financial Analysis & Capital Allocation Strategy

A thorough assessment of CPKC’s financial health, historical performance, and capital allocation priorities is essential to understanding the risks and potential returns of the investment proposition. The KCS acquisition represents a pivotal moment in the company’s financial history, fundamentally altering its balance sheet and return profile.

Historical Financial Performance (10+ Year View)

An examination of Canadian Pacific’s financial results over the past decade reveals a clear inflection point in performance that coincides with the full implementation of the PSR operating model around 2012-2013. The company’s revenues grew steadily from approximately C6.6billionin2014toC8.8 billion in 2022, before the merger with KCS propelled combined revenues to C$14.5 billion in 2024.²⁴ Net income has followed a similar upward trajectory, albeit with more year-to-year volatility driven by economic cycles and one-time items.⁴⁸

The most telling metric of long-term value creation is Return on Invested Capital (ROIC), which measures how efficiently a company generates profits from the capital provided by its debt and equity holders. Prior to the KCS transaction, CP was a high-ROIC business, demonstrating strong capital discipline. The company’s ROIC peaked at an impressive 17.2% in 2020. However, as the acquisition process began, the metric declined sharply to 8.3% in 2021 and hit a five-year low of 5.2% in 2022.⁴⁹ The latest twelve-month ROIC stands at approximately 6.6%.⁴⁹

This precipitous drop in ROIC is a direct and mathematically inevitable consequence of the merger’s accounting. The ~$31 billion acquisition massively increased the “Invested Capital” denominator in the ROIC calculation (NOPAT/InvestedCapital). The numerator, Net Operating Profit After Tax (NOPAT), only increased by the amount of KCS’s pre-existing earnings. This immediate and significant dilution of the ROIC metric creates what can be termed an ROIC “J-Curve.” The central challenge for management, and the most critical metric for investors to monitor over the next three to five years, is the trajectory of this J-curve.

A successful integration will see the NOPAT numerator grow at a much faster rate than the invested capital base. The high-margin revenue synergies from the merger are expected to flow directly to NOPAT, driving this outsized growth. If management executes its plan successfully, the ROIC should not only recover to its pre-merger levels in the mid-teens but eventually exceed them, proving that the acquisition created substantial long-term shareholder value. A failure to achieve a steep recovery in ROIC over the investment horizon would signal that the price paid for KCS was too high or that the promised synergies failed to materialize as planned.

---

Table 4: 10-Year Financial Summary & ROIC Trend Analysis (2015-2024)

Fiscal Year	Total Revenues (C$M)	Net Income (C$M)	Diluted EPS (C$)	Free Cash Flow (C$M)	ROIC (%)
2015	$6,712	$1,733	$1.69	$78	13.9%
2016	$6,232	$1,566	$2.14	$883	12.5%
2017	$6,554	$2,367	$3.30	$838	17.2%
2018	$7,316	$1,904	$2.73	$1,114	14.0%
2019	$7,792	$2,442	$3.52	$1,324	15.2%
2020	$7,710	$2,456	$3.61	$1,131	17.2%
2021	$7,995	$2,705	$4.20	$2,156	8.3%
2022	$8,814	$3,582	$3.78	$2,585	5.2%
2023	$12,555	$3,927	$4.22	$1,638	6.2%
2024	$14,546	$3,718	$3.98	$2,406	6.5%
Note: Financial data is in Canadian Dollars. Data from 2023 onward reflects the consolidation of KCS. ROIC data is compiled from multiple sources and may reflect different calculation methodologies. Sources:.47

---

Balance Sheet & Capital Deployment

To fund the cash portion of the KCS acquisition, CPKC took on a significant amount of debt. At the time of the transaction, the company expected its total outstanding debt to be approximately $20 billion.³ As of the second quarter of 2025, the company’s adjusted net debt to adjusted EBITDA ratio stood at a manageable, but elevated, 3.0x.³⁵

Management has outlined a clear and balanced capital allocation strategy. The first priority is reinvesting in the business to ensure safety and support growth. The company has guided capital expenditures of $2.9 billion for 2025, with a long-term plan for $2.6 billion to $2.8 billion per year through 2028.⁴⁶ A meaningful portion of this capital is designated as “growth capex” directly tied to realizing merger synergies, such as extending sidings to accommodate longer trains and completing the Laredo bridge expansion.⁴⁶

After investing in the business, the next priority is deleveraging the balance sheet. To that end, the company temporarily suspended its share repurchase program following the merger announcement. However, signaling confidence in its future cash flow generation, CPKC announced a new share repurchase program in February 2025 and increased its dividend by 20% in April 2025.⁴⁶ This balanced approach of deleveraging, investing for growth, and returning capital to shareholders is consistent with a mature, well-managed industrial company.

VII. Headwinds & Key Risks: Navigating a Complex Environment

While the long-term strategic rationale for CPKC is compelling, the company faces a number of significant headwinds and risks over the investment horizon. These can be categorized into macroeconomic/cyclical risks and operational/integration risks.

Macroeconomic & Cyclical Risks

As a freight transportation provider, CPKC’s volumes and financial performance are inextricably linked to the health of the broader North American economy. An economic slowdown or recession would lead to reduced manufacturing output, lower consumer spending, and decreased construction activity, which would in turn depress freight demand across nearly all of the company’s commodity segments.¹⁶ Management explicitly acknowledged this risk in April 2025 when it amended its full-year earnings guidance, citing “ongoing tariff and trade policy uncertainty” and a “heightened risk of economic recession” as reasons for a more cautious outlook.⁶

The competitive dynamic with trucking, which is central to the company’s growth strategy, is also subject to cyclical forces, particularly fuel prices. Rail’s cost advantage over truck is most pronounced when diesel prices are high. A significant and sustained decline in fuel costs could narrow this advantage, potentially leading some shippers, especially those with time-sensitive intermodal freight, to shift volumes back to the highway.²⁸ Therefore, while the KCS merger provides powerful secular tailwinds, investors must remain cognizant of the cyclical headwinds that can impact the entire industry’s performance in any given year.

Operational & Integration Risks

The period from 2022 to 2024 has highlighted several operational challenges inherent to the railroad industry. In Canada, CPKC has faced a contentious relationship with the Teamsters Canada Rail Conference (TCRC), its primary union. Labor disputes led to work stoppages that disrupted the Canadian supply chain in both 2022 and 2024.⁵⁶ The 2024 dispute, which involved a four-day shutdown of the national rail system, ultimately required federal government intervention and resulted in a four-year contract being imposed through binding arbitration.⁵⁶ This history of labor friction represents an ongoing risk to network stability.

Extreme weather events pose another constant and growing threat to network operations. The unprecedented “atmospheric river” event that caused catastrophic flooding and landslides in British Columbia in late 2021 severed all rail access to the Port of Vancouver for an extended period, severely impacting both CP and CN.⁵⁷ More recently, widespread wildfires in Western Canada during the summers of 2023 and 2024 have also threatened network fluidity and posed significant operational challenges.⁵⁸

Finally, the sheer complexity of integrating the KCS network cannot be overstated. Merging two Class I railroads involves combining disparate information technology systems, harmonizing different operating practices and union agreements, and aligning corporate cultures. Management acknowledged these difficulties in its Q2 2025 earnings release, citing “challenges in portions of our southern U.S. network following our complex system integration”.³⁴ As discussed, these challenges were reflected in a temporary deterioration of key service metrics following the merger’s close.⁵ While management has a strong track record of operational execution, the combination of potential labor instability, increasing climate-related disruptions, and the monumental task of the KCS integration creates significant operational hurdles that could impact service quality, cost control, and financial results.

VIII. Valuation Context: Assessing a Premier Infrastructure Asset

This section provides a framework for assessing CPKC’s valuation relative to its peers and its own historical trading patterns. This analysis is intended to provide context and does not constitute a price target or investment recommendation.

Relative Valuation

A comparison of valuation multiples among the publicly traded Class I railroads reveals that the market is currently awarding CPKC a premium valuation. As of mid-2025, the forward price-to-earnings (P/E) ratios for peers like Union Pacific and Norfolk Southern were in the range of 19x, with CSX trading closer to 21x.³⁹ In contrast, CPKC’s P/E ratio was higher, trading in a range of approximately 23x to 26x based on various estimates.³⁹

Historical data provides further context. Over the last ten years, a peer like CSX has traded at an average P/E ratio of approximately 18x.⁴⁰ Enterprise Value to EBITDA (EV/EBITDA) multiples tell a similar story. CPKC’s historical median EV/EBITDA multiple over the past decade was 12.86x, but its current multiple is significantly higher, in the range of 16x to 17x.⁴¹

The clear implication is that the market has priced in a significant amount of future success for CPKC. The premium valuation relative to its peers reflects a strong consensus expectation that the KCS merger will deliver superior, above-industry-average growth in revenue and earnings over the medium term. This premium is the market’s vote of confidence in the strategic rationale of the merger and in management’s ability to execute on the synergy plan. However, it also implies that the company has less room for error; any significant stumbles in the integration process or failure to meet growth expectations could put this premium valuation at risk.

---

Table 5: Class I Railroad Valuation Multiples Comparison (as of Q2 2025)

Metric	CPKC	CN	UP	CSX	NS
Forward P/E Ratio	~22.5x	~20.0x	~19.0x	~21.0x	~18.5x
TTM P/E Ratio	~26.3x	~21.5x	~19.4x	~21.1x	~19.0x
5-Yr Avg. P/E Ratio	~23.0x	~22.5x	~22.0x	~19.2x	~22.0x
Forward EV/EBITDA	~15.5x	~13.5x	~12.5x	~13.0x	~12.0x
TTM EV/EBITDA	~16.7x	~14.5x	~13.0x	~14.0x	~12.5x
5-Yr Avg. EV/EBITDA	~17.0x	~15.0x	~14.0x	~13.5x	~14.5x
Dividend Yield (Fwd)	0.90%	1.90%	2.40%	1.30%	2.20%
Note: Data is estimated based on market data as of mid-2025 and consensus analyst estimates. Multiples are subject to market fluctuations. Historical averages are approximate. Sources:.39

---

Fundamental Valuation Drivers

Beyond relative multiples, the intrinsic value of CPKC is driven by several fundamental characteristics of its business model:

• Operating Leverage: The railroad business model is characterized by high operating leverage due to its massive fixed asset base. Once the fixed costs of maintaining the network are covered, a large portion of each incremental revenue dollar flows directly to operating income. This is why the revenue synergies from the KCS merger are so powerful; they represent high-margin revenue being layered on top of a largely fixed cost structure, which should drive significant profit growth.
• Long-Term Pricing Power: As a member of a rational oligopoly with high barriers to entry, the rail industry has historically demonstrated the ability to increase prices at a rate that exceeds inflation. This durable pricing power is a key driver of long-term value creation and helps protect margins during inflationary periods.
• Terminal Value: As a unique and perpetual infrastructure asset, a significant portion of CPKC’s intrinsic value lies in its terminal value—the present value of all cash flows beyond the explicit forecast period. The key assumptions underpinning this value are the indefinite lifespan of the franchise, the enduring barriers to entry, and the company’s ability to consistently earn returns on its capital that exceed its weighted average cost of capital (WACC) over the very long term. The ultimate success of the KCS integration in driving a sustained, high-ROIC business model is therefore the single most important determinant of CPKC’s long-term intrinsic value.

IX. Conclusion: The Long-Term Investment Proposition

Canadian Pacific Kansas City Limited represents a unique and compelling investment case within the North American transportation sector. The company has transformed itself from a strong, efficient, but geographically constrained Canadian railroad into a transcontinental powerhouse with an unrivaled network spanning North America’s key trade corridors.

The bullish thesis is clear and powerful. It is predicated on a once-in-a-generation strategic combination that creates a unique North-South network perfectly positioned to capitalize on the powerful secular growth trends of USMCA trade and supply chain nearshoring. This strategic advantage is backed by a proven management team with a deep-rooted and highly successful track record of operational excellence through the implementation of Precision Scheduled Railroading. The potential to convert significant volumes of freight from truck to rail on new, efficient single-line routes forms the basis of a multi-year growth story that is unique among its Class I peers.

The bearish counterarguments are equally clear and center on the considerable risks associated with this transformation. The primary risk is execution. The integration of Kansas City Southern is the largest and most complex rail merger in decades, and any significant missteps in harmonizing operations, technology, and culture could jeopardize the promised synergies. To finance this ambition, the company has added substantial leverage to its balance sheet, increasing its financial risk profile. Finally, CPKC is not immune to the forces that affect the entire industry; its performance is still subject to the cyclicality of the macroeconomy, the volatility of fuel prices, and the ever-present threat of operational disruptions from labor disputes and extreme weather.

Ultimately, the investment proposition for CPKC over a three-to-five-year horizon is a referendum on management’s ability to navigate these challenges and deliver on the merger’s transformative potential. The path forward will be defined by their success in integrating KCS, realizing the billion-dollar synergy target, and, most importantly, driving a strong and sustained recovery in the company’s Return on Invested Capital. The current premium valuation suggests the market expects success, making the margin for error relatively thin.

Works cited

1. CPKC announces filing of 2024 annual report on Form 10-K, accessed August 4, 2025, https://investor.cpkcr.com/news/press-release-details/2025/CPKC-announces-filing-of-2024-annual-report-on-Form-10-K/default.aspx
2. CPKC announces filing of 2024 annual report on Form 10-K, accessed August 4, 2025, https://www.cpkcr.com/en/media/10k-feb2025
3. Canadian Pacific and Kansas City Southern Execute Agreement to Combine, Creating First Single-Line Rail Network Linking U.S.-Mexico-Canada – CPKC, accessed August 4, 2025, https://www.cpkcr.com/es/medios-de-comunicacion/canadian-pacific-and-kansas-city-southern-execute-agreement-to-c
4. Investor Presentation, accessed August 4, 2025, https://s21.q4cdn.com/736796105/files/doc_presentations/2021/11/CP-Investor-Presentation-Nov2021.pdf
5. North American Class I Freight Rail Performance: Q1 2025 – Oliver Wyman, accessed August 4, 2025, https://www.oliverwyman.com/our-expertise/insights/2025/may/north-american-freight-rail-performance.html
6. Q1 2025 Quarterly Report – 10-Q, accessed August 4, 2025, https://s21.q4cdn.com/736796105/files/doc_financials/2025/q1/Q1-2025-First-Quarter-Report-with-Covers.pdf
7. CPKC reports first quarter results; solid demand, precision execution and a resilient network powers strong start to 2025, accessed August 4, 2025, https://investor.cpkcr.com/news/press-release-details/2025/CPKC-reports-first-quarter-results-solid-demand-precision-execution-and-a-resilient-network-powers-strong-start-to-2025/default.aspx
8. Freight Rail Industry Resources | AAR – Association of American Railroads, accessed August 4, 2025, https://www.aar.org/resources/
9. Rail – 2025 Infrastructure Report Card, accessed August 4, 2025, https://infrastructurereportcard.org/wp-content/uploads/2025/03/Rail.pdf
10. Freight Rail Overview | FRA – Federal Railroad Administration, accessed August 4, 2025, https://railroads.dot.gov/rail-network-development/freight-rail-overview
11. Surface Transportation Board, accessed August 4, 2025, https://www.stb.gov/
12. Major Railroad Mergers – Resources – Surface Transportation Board, accessed August 4, 2025, https://www.stb.gov/resources/major-railroad-mergers/
13. STB Enforces Merger Conditions Facilitating Continued Competitive Options for Grain Traffic to Gulf Coast – Surface Transportation Board, accessed August 4, 2025, https://www.stb.gov/news-communications/latest-news/pr-25-24/
14. STB Receives Notice of Intent for Proposed Merger of Union Pacific and Norfolk Southern – Surface Transportation Board, accessed August 4, 2025, https://www.stb.gov/news-communications/latest-news/pr-25-27/
15. Latest News – Surface Transportation Board, accessed August 4, 2025, https://www.stb.gov/news-communications/latest-news/
16. AAR sees ‘uncertainty’ for US railroads in 2025 – FreightWaves, accessed August 4, 2025, https://www.freightwaves.com/news/aar-sees-uncertainty-for-us-railroads-in-2025
17. Rail Industry Overview – Association of American Railroads, accessed August 4, 2025, https://www.aar.org/wp-content/uploads/2025/03/AAR-RIO-March-10-2025-FINAL.pdf
18. U.S. production of all types of coal has declined over the past two decades – U.S. Energy Information Administration (EIA), accessed August 4, 2025, https://www.eia.gov/todayinenergy/detail.php?id=64924
19. Global coal demand to remain on a plateau in 2025 and 2026 …, accessed August 4, 2025, https://www.iea.org/news/global-coal-demand-to-remain-on-a-plateau-in-2025-and-2026
20. Weakening demand, steady supply: What’s driving coal’s price decline in 2025?, accessed August 4, 2025, https://blogs.worldbank.org/en/opendata/weakening-demand–steady-supply–what-s-driving-coal-s-decline-i
21. Canadian Pacific and Kansas City Southern Agree to Combine to Create the First U.S.-Mexico-Canada Rail Network – CPKC, accessed August 4, 2025, https://www.cpkcr.com/en/media/Canadian-Pacific-and-Kansas-City-Southern-Agree-to-Combine-to-Create-the-First-U-S-Mexico-Canada-Rail-Network
22. Union Pacific and Norfolk Southern to Create America’s First Transcontinental Railroad, accessed August 4, 2025, https://www.up.com/press-releases/growth/norfolk-southern-transcontinental-nr-250729
23. CPKC 2024 Annual Report, accessed August 4, 2025, https://s21.q4cdn.com/736796105/files/doc_financials/2024/ar/CPKC-2024-Annual-Report-Web_Final.pdf
24. CPKC – Canadian Pacific Kansas City Limited (via Public) / Annual …, accessed August 4, 2025, https://www.publicnow.com/view/D8E970056B0194002276B566EE3FC9F7F1EDA043?1740674856
25. Union Pacific Reports Fourth Quarter and Full Year 2024 Results, accessed August 4, 2025, https://www.up.com/press-releases/financial/4q24-earnings-announcement-nr-250123
26. TransBorder Freight Annual Report 2024 – Bureau of Transportation Statistics (BTS), accessed August 4, 2025, https://www.bts.gov/newsroom/transborder-freight-annual-report-2024-0
27. ᑕ❶ᑐ Train vs Truck – Advantages and Disadvantages – FreightRun.com, accessed August 4, 2025, https://www.freightrun.com/blog/post/train-vs-truck
28. The Effects Of Fuel Prices & International Trade On Railroad Freight – Railway Tie Association, accessed August 4, 2025, https://www.rta.org/assets/docs/MayJune2008/effects%20of%20fuel%20prices.pdf
29. Canadian Pacific Kansas City Limited (CP) Q4 2024 Earnings …, accessed August 4, 2025, https://seekingalpha.com/article/4753174-canadian-pacific-kansas-city-limited-cp-q4-2024-earnings-conference-call-transcript
30. Precision railroading | EBSCO Research Starters, accessed August 4, 2025, https://www.ebsco.com/research-starters/sports-and-leisure/precision-railroading
31. Precision railroading – Wikipedia, accessed August 4, 2025, https://en.wikipedia.org/wiki/Precision_railroading
32. Who We Are – CPKC, accessed August 4, 2025, https://www.cpkcr.com/en/about-cpkc/who-we-are
33. Precision railroading philosophy can build a leading … – CPKC, accessed August 4, 2025, https://investor.cpkcr.com/news/press-release-details/2016/Precision-railroading-philosophy-can-build-a-leading-transcontinental-railway-CP-argues-in-white-paper/default.aspx
34. CPKC second quarter delivers strong growth, carries momentum into second half of 2025, accessed August 4, 2025, https://www.cpkcr.com/en/media/q2results2025
35. CPKC Q2 2025 slides: Revenue up 3%, EPS jumps 37% amid …, accessed August 4, 2025, https://www.investing.com/news/company-news/cpkc-q2-2025-slides-revenue-up-3-eps-jumps-37-amid-mixed-operational-metrics-93CH-4161071
36. CPKC’s Q2 2025 Earnings: A Masterclass in Operational Efficiency …, accessed August 4, 2025, https://www.ainvest.com/news/cpkc-q2-2025-earnings-masterclass-operational-efficiency-strategic-growth-2507/
37. Financials – CPKC, accessed August 4, 2025, https://investor.cpkcr.com/financials/default.aspx?section=results
38. CPKC – Overview, accessed August 4, 2025, https://investor.cpkcr.com/overview/default.aspx
39. CP Stock Price Quote – Canadian Pacific Kansas City Ltd – Morningstar, accessed August 4, 2025, https://www.morningstar.com/stocks/xnys/cp/quote
40. CSX – Csx PE ratio, current and historical analysis – FullRatio, accessed August 4, 2025, https://fullratio.com/stocks/nasdaq-csx/pe-ratio
41. CP (Canadian Pacific Kansas City) EV-to-EBITDA – GuruFocus, accessed August 4, 2025, https://www.gurufocus.com/term/enterprise-value-to-ebitda/CP
42. Annual Reports | Union Pacific Railroad Company, accessed August 4, 2025, https://investor.unionpacific.com/financials/annual-reports?mobile=1
43. Stock Information – CSX Corporation, accessed August 4, 2025, https://investors.csx.com/stock-information/default.aspx
44. Investor Relations | Norfolk Southern – SEC Filings, accessed August 4, 2025, https://norfolksouthern.investorroom.com/sec-filings?cat=1&year=2025
45. Financial Results | cn.ca, accessed August 4, 2025, https://www.cn.ca/en/investors/financial-results/
46. Investor Presentation: April 2025 TSX/NYSE: CP, accessed August 4, 2025, https://s21.q4cdn.com/736796105/files/doc_presentations/2025/04/CPKC-Investor-Presentation_April-2025_vF2.pdf
47. Canadian Pacific Kansas City (TSX:CP) Financials – Income Statement – Stock Analysis, accessed August 4, 2025, https://stockanalysis.com/quote/tsx/CP/financials/
48. Canadian Pacific Kansas City Net Income 2010-2025 | CP – Macrotrends, accessed August 4, 2025, https://www.macrotrends.net/stocks/charts/CP/canadian-pacific-kansas-city/net-income
49. Return on Invested Capital For Canadian Pacific Kansas City …, accessed August 4, 2025, https://finbox.com/NYSE:CP/explorer/roic/
50. Canadian Pacific Kansas City Revenue 2010-2025 | CP – Macrotrends, accessed August 4, 2025, https://www.macrotrends.net/stocks/charts/CP/canadian-pacific-kansas-city/revenue
51. Canadian Pacific Railway Limited Stock — CP Overview – Roic AI, accessed August 4, 2025, https://www.roic.ai/quote/CP
52. CPKC delivers strong fourth-quarter results; positioned to accelerate growth in 2025, accessed August 4, 2025, https://www.cpkcr.com/en/media/Q4-2024-Results
53. Transcript – Public now, accessed August 4, 2025, https://docs.publicnow.com/viewDoc.aspx?filename=41823\EXT\E433936E9CC110DCF63F535FC80E7A9199DF4195_3C72B8B54E6EBD0C5FAB0BA192FB8D2468B7AA63.PDF
54. News – CPKC, accessed August 4, 2025, https://investor.cpkcr.com/news/default.aspx
55. Evolve: How higher fuel prices affect trucking and rail – FreightWaves, accessed August 4, 2025, https://www.freightwaves.com/news/evolve:-how-higher-fuel-prices-affect-trucking-and-rail
56. Arbitrator awards 4-year deal for 3,300 CPKC workers after last …, accessed August 4, 2025, https://www.realagriculture.com/2025/05/arbitrator-awards-4-year-deal-for-3300-cpkc-workers-after-last-summers-rail-stoppage/
57. Climate change and flooding in Canada, accessed August 4, 2025, https://climateinstitute.ca/news/fact-sheet-climate-change-and-flooding/
58. FACT SHEET: Climate change and wildfires in Canada, accessed August 4, 2025, https://climateinstitute.ca/news/fact-sheet-wildfires/
59. Understanding the human cost of extreme weather – KPMG Canada, accessed August 4, 2025, https://kpmg.com/ca/en/home/insights/2024/10/understanding-the-human-cost-of-extreme-weather.html
60. Union Pacific PE Ratio Insights – YCharts, accessed August 4, 2025, https://ycharts.com/companies/UNP/pe_ratio
61. CSX PE Ratio 2010-2025 – Macrotrends, accessed August 4, 2025, https://www.macrotrends.net/stocks/charts/CSX/csx/pe-ratio