Canadian Pacific Railway Limited (PC Free report) currently benefiting from the Kansas City Southern takeover and shareholder-friendly efforts. However, high indebtedness is worrisome.

Canadian Pacific’s expected long-term (three to five year) earnings per share (EPS) growth rate is set at 9.6%.

Factors that bode well

We are encouraged by Canadian Pacific’s decision to pay dividends even in the current uncertain scenario. CP paid dividends worth C$507 million in 2021, up 8.6% year-on-year. In the first quarter of 2022, CP distributed dividends worth C$177 million, up 39.3% year-over-year.

In December 2021, Canadian Pacific announced the completion of the purchase of Kansas City Southern for $31 billion (including outstanding debt of $3.8 billion). Following the closing of the acquisition, the shares of KCS were placed in a voting trust with Dave Starling, former president and CEO of KCS, appointed as the voting trustee. The voting trust, which ensures KCS will operate independently of CP, will remain in place until the US Surface Transportation Board issues its decision on the companies’ joint rail control application. The STB review is expected to be completed in the fourth quarter of 2022.

A key risk

Canadian Pacific is a highly leveraged business. Its gearing ratio (in percentage) currently stands at 53%. A high debt ratio does not bode well and is risky, as it implies that CP is aggressively financing its growth with debt.

Zacks ranking and key picks

Canadian Pacific currently wears a No. 3 (Hold) Zacks rank. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some higher ranked stocks within the broader Zacks Transportation sector are Ryder System, Inc. (R Free Report), CH Robinson Worldwide, Inc. (CHRW Free report) and GATX Company (GATX Free report) .

Ryder has a trailing four-quarter surprise of 48.2%, on average, as its earnings have exceeded Zacks’ consensus estimate for the past four quarters. R benefits from improving economic and freight conditions in the United States. Revenues from all segments increased (thanks to higher rental income, new business and favorable pricing) in the first quarter of 2022.

R currently sports a Zacks Rank #1 (Strong Buy).

The expected long-term (three to five year) growth rate of earnings per share (EPS) for CH Robinson is set at 9%. Improved freight market conditions are helping CHRW. In the first quarter of 2022, revenue improved by 41.8% thanks to favorable truckload prices for customers and healthy profits in ocean freight.

Driven by the positives, the stock has risen 9.7% over the past year. CHRW currently sports a Zacks rank of 1.

GATX has a trailing four-quarter surprise of 40.1%, on average, as its earnings have exceeded Zacks’ consensus estimate for the past four quarters. The gradual improvement in the North American railcar rental market is a huge plus for GATX.

Buoyed by the upside, the stock has risen 11.8% over the past year. GATX currently has a Zacks rank #2 (buy).