Intrinsic value of Canadian Pacific Railway Limited - CP

Previous Close

$220.36

  Intrinsic Value

$88.88

stock screener

  Rating & Target

str. sell

-60%

  Value-price divergence*

0%

Previous close

$220.36

 
Intrinsic value

$88.88

 
Up/down potential

-60%

 
Rating

str. sell

 
Value-price divergence*

0%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of CP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 32.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -7.15
  13.30
  12.47
  11.72
  11.05
  10.45
  9.90
  9.41
  8.97
  8.57
  8.22
  7.89
  7.60
  7.34
  7.11
  6.90
  6.71
  6.54
  6.38
  6.25
  6.12
  6.01
  5.91
  5.82
  5.74
  5.66
  5.60
  5.54
  5.48
  5.43
  5.39
Revenue, $m
  6,232
  7,061
  7,941
  8,872
  9,853
  10,882
  11,959
  13,085
  14,259
  15,481
  16,753
  18,075
  19,450
  20,878
  22,363
  23,905
  25,509
  27,177
  28,912
  30,718
  32,598
  34,557
  36,599
  38,728
  40,949
  43,267
  45,689
  48,218
  50,862
  53,626
  56,517
Variable operating expenses, $m
 
  4,227
  4,752
  5,306
  5,891
  6,504
  7,146
  7,817
  8,516
  9,245
  10,003
  10,772
  11,591
  12,442
  13,327
  14,246
  15,202
  16,196
  17,230
  18,306
  19,426
  20,594
  21,810
  23,079
  24,403
  25,785
  27,227
  28,735
  30,310
  31,957
  33,680
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  3,679
  4,227
  4,752
  5,306
  5,891
  6,504
  7,146
  7,817
  8,516
  9,245
  10,003
  10,772
  11,591
  12,442
  13,327
  14,246
  15,202
  16,196
  17,230
  18,306
  19,426
  20,594
  21,810
  23,079
  24,403
  25,785
  27,227
  28,735
  30,310
  31,957
  33,680
Operating income, $m
  2,553
  2,834
  3,190
  3,566
  3,962
  4,378
  4,813
  5,268
  5,742
  6,236
  6,750
  7,304
  7,859
  8,436
  9,036
  9,659
  10,307
  10,981
  11,682
  12,412
  13,172
  13,963
  14,788
  15,648
  16,546
  17,483
  18,461
  19,483
  20,551
  21,668
  22,836
EBITDA, $m
  3,193
  3,569
  4,014
  4,485
  4,980
  5,501
  6,045
  6,614
  7,207
  7,825
  8,468
  9,137
  9,832
  10,554
  11,304
  12,084
  12,894
  13,737
  14,614
  15,527
  16,478
  17,468
  18,500
  19,576
  20,699
  21,871
  23,095
  24,373
  25,710
  27,107
  28,568
Interest expense (income), $m
  488
  476
  583
  697
  816
  943
  1,075
  1,214
  1,359
  1,510
  1,667
  1,830
  2,001
  2,177
  2,361
  2,552
  2,751
  2,957
  3,172
  3,395
  3,627
  3,869
  4,121
  4,384
  4,658
  4,944
  5,242
  5,554
  5,879
  6,219
  6,575
Earnings before tax, $m
  2,152
  2,358
  2,606
  2,869
  3,146
  3,435
  3,738
  4,054
  4,384
  4,727
  5,083
  5,473
  5,858
  6,259
  6,675
  7,107
  7,557
  8,024
  8,511
  9,017
  9,544
  10,094
  10,667
  11,264
  11,888
  12,539
  13,219
  13,930
  14,672
  15,449
  16,261
Tax expense, $m
  553
  637
  704
  775
  849
  928
  1,009
  1,095
  1,184
  1,276
  1,372
  1,478
  1,582
  1,690
  1,802
  1,919
  2,040
  2,167
  2,298
  2,435
  2,577
  2,725
  2,880
  3,041
  3,210
  3,386
  3,569
  3,761
  3,962
  4,171
  4,391
Net income, $m
  1,599
  1,721
  1,903
  2,095
  2,296
  2,508
  2,729
  2,960
  3,200
  3,450
  3,711
  3,995
  4,277
  4,569
  4,872
  5,188
  5,516
  5,858
  6,213
  6,582
  6,967
  7,369
  7,787
  8,223
  8,678
  9,154
  9,650
  10,169
  10,711
  11,278
  11,871

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  164
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  19,221
  21,593
  24,285
  27,132
  30,131
  33,278
  36,573
  40,015
  43,604
  47,342
  51,232
  55,276
  59,480
  63,848
  68,387
  73,105
  78,010
  83,110
  88,416
  93,938
  99,688
  105,679
  111,922
  118,433
  125,226
  132,316
  139,721
  147,456
  155,540
  163,993
  172,834
Adjusted assets (=assets-cash), $m
  19,057
  21,593
  24,285
  27,132
  30,131
  33,278
  36,573
  40,015
  43,604
  47,342
  51,232
  55,276
  59,480
  63,848
  68,387
  73,105
  78,010
  83,110
  88,416
  93,938
  99,688
  105,679
  111,922
  118,433
  125,226
  132,316
  139,721
  147,456
  155,540
  163,993
  172,834
Revenue / Adjusted assets
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
  0.327
Average production assets, $m
  16,493
  18,690
  21,021
  23,485
  26,080
  28,805
  31,656
  34,636
  37,742
  40,978
  44,345
  47,845
  51,484
  55,265
  59,194
  63,277
  67,523
  71,937
  76,530
  81,310
  86,287
  91,472
  96,876
  102,512
  108,392
  114,529
  120,938
  127,633
  134,631
  141,947
  149,600
Working capital, $m
  -338
  -544
  -611
  -683
  -759
  -838
  -921
  -1,008
  -1,098
  -1,192
  -1,290
  -1,392
  -1,498
  -1,608
  -1,722
  -1,841
  -1,964
  -2,093
  -2,226
  -2,365
  -2,510
  -2,661
  -2,818
  -2,982
  -3,153
  -3,332
  -3,518
  -3,713
  -3,916
  -4,129
  -4,352
Total debt, $m
  8,684
  10,608
  12,667
  14,845
  17,139
  19,547
  22,067
  24,700
  27,446
  30,306
  33,281
  36,375
  39,591
  42,933
  46,405
  50,014
  53,766
  57,668
  61,727
  65,952
  70,350
  74,933
  79,710
  84,690
  89,887
  95,311
  100,975
  106,893
  113,077
  119,544
  126,307
Total liabilities, $m
  14,595
  16,519
  18,578
  20,756
  23,050
  25,458
  27,978
  30,611
  33,357
  36,217
  39,192
  42,286
  45,502
  48,844
  52,316
  55,925
  59,677
  63,579
  67,638
  71,863
  76,261
  80,844
  85,621
  90,601
  95,798
  101,222
  106,886
  112,804
  118,988
  125,455
  132,218
Total equity, $m
  4,626
  5,074
  5,707
  6,376
  7,081
  7,820
  8,595
  9,403
  10,247
  11,125
  12,039
  12,990
  13,978
  15,004
  16,071
  17,180
  18,332
  19,531
  20,778
  22,075
  23,427
  24,834
  26,302
  27,832
  29,428
  31,094
  32,834
  34,652
  36,552
  38,538
  40,616
Total liabilities and equity, $m
  19,221
  21,593
  24,285
  27,132
  30,131
  33,278
  36,573
  40,014
  43,604
  47,342
  51,231
  55,276
  59,480
  63,848
  68,387
  73,105
  78,009
  83,110
  88,416
  93,938
  99,688
  105,678
  111,923
  118,433
  125,226
  132,316
  139,720
  147,456
  155,540
  163,993
  172,834
Debt-to-equity ratio
  1.877
  2.090
  2.220
  2.330
  2.420
  2.500
  2.570
  2.630
  2.680
  2.720
  2.760
  2.800
  2.830
  2.860
  2.890
  2.910
  2.930
  2.950
  2.970
  2.990
  3.000
  3.020
  3.030
  3.040
  3.050
  3.070
  3.080
  3.080
  3.090
  3.100
  3.110
Adjusted equity ratio
  0.234
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235
  0.235

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,599
  1,721
  1,903
  2,095
  2,296
  2,508
  2,729
  2,960
  3,200
  3,450
  3,711
  3,995
  4,277
  4,569
  4,872
  5,188
  5,516
  5,858
  6,213
  6,582
  6,967
  7,369
  7,787
  8,223
  8,678
  9,154
  9,650
  10,169
  10,711
  11,278
  11,871
Depreciation, amort., depletion, $m
  640
  735
  824
  919
  1,018
  1,123
  1,232
  1,346
  1,465
  1,589
  1,718
  1,833
  1,973
  2,117
  2,268
  2,424
  2,587
  2,756
  2,932
  3,115
  3,306
  3,505
  3,712
  3,928
  4,153
  4,388
  4,634
  4,890
  5,158
  5,439
  5,732
Funds from operations, $m
  2,034
  2,456
  2,727
  3,013
  3,315
  3,630
  3,961
  4,306
  4,665
  5,040
  5,429
  5,829
  6,249
  6,686
  7,140
  7,613
  8,103
  8,614
  9,145
  9,698
  10,273
  10,873
  11,499
  12,151
  12,831
  13,542
  14,284
  15,059
  15,869
  16,716
  17,603
Change in working capital, $m
  -55
  -64
  -68
  -72
  -75
  -79
  -83
  -87
  -90
  -94
  -98
  -102
  -106
  -110
  -114
  -119
  -123
  -128
  -134
  -139
  -145
  -151
  -157
  -164
  -171
  -179
  -186
  -195
  -204
  -213
  -223
Cash from operations, $m
  2,089
  2,520
  2,795
  3,085
  3,390
  3,710
  4,044
  4,392
  4,756
  5,134
  5,527
  5,930
  6,355
  6,796
  7,255
  7,731
  8,227
  8,742
  9,278
  9,837
  10,418
  11,024
  11,656
  12,315
  13,002
  13,720
  14,470
  15,254
  16,073
  16,929
  17,825
Maintenance CAPEX, $m
  0
  -632
  -716
  -805
  -900
  -999
  -1,104
  -1,213
  -1,327
  -1,446
  -1,570
  -1,699
  -1,833
  -1,973
  -2,117
  -2,268
  -2,424
  -2,587
  -2,756
  -2,932
  -3,115
  -3,306
  -3,505
  -3,712
  -3,928
  -4,153
  -4,388
  -4,634
  -4,890
  -5,158
  -5,439
New CAPEX, $m
  -1,182
  -2,197
  -2,331
  -2,464
  -2,595
  -2,724
  -2,852
  -2,979
  -3,107
  -3,236
  -3,367
  -3,501
  -3,638
  -3,781
  -3,929
  -4,084
  -4,245
  -4,415
  -4,593
  -4,780
  -4,977
  -5,185
  -5,404
  -5,636
  -5,880
  -6,137
  -6,409
  -6,695
  -6,998
  -7,316
  -7,652
Cash from investing activities, $m
  -1,069
  -2,829
  -3,047
  -3,269
  -3,495
  -3,723
  -3,956
  -4,192
  -4,434
  -4,682
  -4,937
  -5,200
  -5,471
  -5,754
  -6,046
  -6,352
  -6,669
  -7,002
  -7,349
  -7,712
  -8,092
  -8,491
  -8,909
  -9,348
  -9,808
  -10,290
  -10,797
  -11,329
  -11,888
  -12,474
  -13,091
Free cash flow, $m
  1,020
  -309
  -252
  -185
  -105
  -14
  88
  200
  322
  452
  590
  731
  883
  1,043
  1,208
  1,380
  1,557
  1,741
  1,930
  2,125
  2,326
  2,533
  2,747
  2,967
  3,195
  3,430
  3,673
  3,924
  4,185
  4,455
  4,734
Issuance/(repayment) of debt, $m
  -46
  1,949
  2,060
  2,178
  2,294
  2,408
  2,521
  2,633
  2,746
  2,860
  2,975
  3,094
  3,216
  3,342
  3,473
  3,609
  3,752
  3,902
  4,059
  4,225
  4,399
  4,583
  4,776
  4,981
  5,197
  5,424
  5,664
  5,918
  6,185
  6,466
  6,763
Issuance/(repurchase) of shares, $m
  -1,189
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,238
  1,949
  2,060
  2,178
  2,294
  2,408
  2,521
  2,633
  2,746
  2,860
  2,975
  3,094
  3,216
  3,342
  3,473
  3,609
  3,752
  3,902
  4,059
  4,225
  4,399
  4,583
  4,776
  4,981
  5,197
  5,424
  5,664
  5,918
  6,185
  6,466
  6,763
Total cash flow (excl. dividends), $m
  -231
  1,640
  1,808
  1,993
  2,189
  2,394
  2,609
  2,833
  3,068
  3,312
  3,566
  3,825
  4,099
  4,384
  4,681
  4,989
  5,309
  5,642
  5,989
  6,349
  6,725
  7,116
  7,523
  7,948
  8,391
  8,854
  9,337
  9,842
  10,369
  10,921
  11,498
Retained Cash Flow (-), $m
  170
  -587
  -633
  -669
  -705
  -740
  -774
  -809
  -843
  -878
  -914
  -950
  -988
  -1,027
  -1,067
  -1,109
  -1,153
  -1,199
  -1,247
  -1,298
  -1,351
  -1,408
  -1,467
  -1,530
  -1,596
  -1,666
  -1,740
  -1,818
  -1,900
  -1,986
  -2,078
Prev. year cash balance distribution, $m
 
  139
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  1,191
  1,175
  1,324
  1,484
  1,654
  1,835
  2,025
  2,224
  2,433
  2,652
  2,874
  3,111
  3,358
  3,614
  3,880
  4,157
  4,444
  4,742
  5,051
  5,373
  5,708
  6,056
  6,418
  6,795
  7,188
  7,597
  8,024
  8,470
  8,934
  9,420
Discount rate, %
 
  8.80
  9.24
  9.70
  10.19
  10.70
  11.23
  11.79
  12.38
  13.00
  13.65
  14.33
  15.05
  15.80
  16.59
  17.42
  18.29
  19.21
  20.17
  21.18
  22.24
  23.35
  24.52
  25.74
  27.03
  28.38
  29.80
  31.29
  32.85
  34.50
  36.22
PV of cash for distribution, $m
 
  1,095
  985
  1,003
  1,007
  995
  969
  928
  874
  810
  737
  659
  578
  499
  421
  349
  283
  224
  174
  131
  97
  70
  49
  33
  22
  14
  9
  5
  3
  2
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Canadian Pacific Railway Limited, together with its subsidiaries, owns and operates a transcontinental freight railway in Canada and the United States. The Company operates through rail transportation segment. The Company's transports bulk commodities, merchandise freight, and intermodal traffic over a network of approximately 12,400 miles. Its railway feeds directly into the United States heartland from the east and west coasts. Its Bulk commodities include grain, coal, potash, fertilizers and sulfur. Its Merchandise freight consists of finished vehicles and machinery, as well as forest and industrial and consumer products. Its Intermodal traffic consists of retail goods in overseas containers that can be transported by train, ship and truck and in domestic containers and trailers that can be moved by train and truck. Its subsidiaries include Canadian Pacific Railway Company, Soo Line Railroad Company, Delaware and Hudson Railway Company, Inc. and Mount Stephen Properties Inc.

FINANCIAL RATIOS  of  Canadian Pacific Railway Limited (CP)

Valuation Ratios
P/E Ratio 20.2
Price to Sales 5.2
Price to Book 7
Price to Tangible Book
Price to Cash Flow 15.4
Price to Free Cash Flow 35.5
Growth Rates
Sales Growth Rate -7.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -22.3%
Cap. Spend. - 3 Yr. Gr. Rate -0.9%
Financial Strength
Quick Ratio 7
Current Ratio 0.1
LT Debt to Equity 187.2%
Total Debt to Equity 187.7%
Interest Coverage 5
Management Effectiveness
Return On Assets 10.1%
Ret/ On Assets - 3 Yr. Avg. 9.6%
Return On Total Capital 11.8%
Ret/ On T. Cap. - 3 Yr. Avg. 11.7%
Return On Equity 33.9%
Return On Equity - 3 Yr. Avg. 27.7%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 88%
Gross Margin - 3 Yr. Avg. 85.3%
EBITDA Margin 52.6%
EBITDA Margin - 3 Yr. Avg. 46.5%
Operating Margin 41%
Oper. Margin - 3 Yr. Avg. 38.8%
Pre-Tax Margin 34.5%
Pre-Tax Margin - 3 Yr. Avg. 31.5%
Net Profit Margin 25.7%
Net Profit Margin - 3 Yr. Avg. 22.7%
Effective Tax Rate 25.7%
Eff/ Tax Rate - 3 Yr. Avg. 28.1%
Payout Ratio 15.9%

CP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CP stock intrinsic value calculation we used $6232 million for the last fiscal year's total revenue generated by Canadian Pacific Railway Limited. The default revenue input number comes from 2016 income statement of Canadian Pacific Railway Limited. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our CP stock valuation model: a) initial revenue growth rate of 13.3% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 8.8%, whose default value for CP is calculated based on our internal credit rating of Canadian Pacific Railway Limited, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Canadian Pacific Railway Limited.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of CP stock the variable cost ratio is equal to 59.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for CP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.5% for Canadian Pacific Railway Limited.

Corporate tax rate of 27% is the nominal tax rate for Canadian Pacific Railway Limited. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the CP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for CP are equal to 264.7%.

Life of production assets of 26.1 years is the average useful life of capital assets used in Canadian Pacific Railway Limited operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for CP is equal to -7.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $4626 million for Canadian Pacific Railway Limited - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 146.545 million for Canadian Pacific Railway Limited is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Canadian Pacific Railway Limited at the current share price and the inputted number of shares is $32.3 billion.

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Financial statements of CP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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