Canadian Pacific Railway Limited (USA) (CP), Union Pacific Corporation (UNP), CSX Corporation (CSX): Will This Railway Deliver for Investors?

Risk vs. reward
When investors think of low-risk investments, railroads and utilities usually come first to mind. Unfortunately, Canadian Pacific doesn’t quite deliver.

Beta measures the sensitivity (i.e., volatility) of a stock relative to the overall market. Higher beta stocks tend to be more volatile, and therefore riskier. But they provide the potential for greater returns than low-beta stocks.

Canadian Pacific’s beta is 1.38. The average for the railroad industry is 1.15, with Norfolk Southern Corp. (NYSE:NSC) (1.13), Union Pacific Corporation (NYSE:UNP) (1.14) and Canadian National (0.97) all delivering less volatility. Canadian Pacific is one of today’s most volatile railroad stocks, and given it’s current valuation, unlikely to deliver the returns necessary to compensate investors for such a high level of risk.

When should you consider taking a ride?
Canadian Pacific must make significant and consistent improvements in its operational performance to justify the expectations driving its valuation, and deliver market-beating returns to shareholders.

Which signals will indicate that Harrison and the rest of Canadian Pacific Railway Limited (USA) (NYSE:CP)’s management team are beginning to deliver those improvements? When Canadian Pacific releases its Q3 results in October, look for:

Improving employee productivity, as measured in gross ton miles per employee

Improved locomotive productivity, as measured in gross ton miles per active horsepower

A significantly lower operating ratio

If investors curb their expectations toward the same standards they’d set for other tier one railroads, and Canadian Pacific can consistently deliver stronger operations, you may want to take a second look at Canadian Pacific. But until then, I’d hesitate before climbing aboard this train.

The article Will This Railway Deliver for Investors? originally appeared on Fool.com and is written by Justin Lacey.

Justin Lacey has no position in any stocks mentioned. The Motley Fool owns shares of CSX.

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