Canadian Pacific formally bids to buy Kansas City Southern: should you invest now?

Canadian Pacific Railway Ltd (NYSE:CP) shares edged more than 1% lower on Tuesday despite formally placing a bid to buy Kansas City Southern (NYSE:KSU) in an all-stock acquisition deal worth $31 billion, or $300 per share.

If the deal is approved, Canadian Pacific could become the largest railway stock by market cap, with a combined value of more than $76.77 billion, slightly higher than Canadian National Railway’s (NYSE:CNI) $76.64 billion, as of this writing.

Kansas City Southern widens Canadian Pacific’s addressable market in the US and puts it in an excellent position to benefit from a recently approved US infrastructure bill.

Should you buy Canadian Pacific shares now?

From a valuation perspective, Canadian Pacific shares trade at an attractive P/E ratio of 15.05, making the stock a compelling option to value investors. However, its growth prospects are less impressive, with analysts expecting earnings per share to grow by just 2.60% this year before 9.42% next year.

However, the prospect of merging with Kansas City Southern could boost its bottom line growth significantly. Analysts expect KSU’s EPS to grow more than 21% this year and at an average annual rate of about 16.50% over the next five years.

Therefore, growth investors could also find Canadian Pacific shares exciting if the merger goes through. 

Technical overview: Canadian Pacific stock price predictions for Q3 2021

Technically, Canadian Pacific shares appear to be trading within a descending channel formation in the intraday chart. In addition, the CP stock price has recently pulled back to move closer to the oversold conditions in the 14-day RSI.

Therefore, investors can target potential rebound profits at approximately $75.16 or higher at $77.90. On the other hand, extended declines could find support at $69.56 and $66.94. Canadian Pacific traded at $71.85 per share as of this writing.

Bottom line: the case for buying the Canadian Pacifica stock price rebound

Canadian Pacific shares edged slightly lower after announcing the official bid to buy Kansas City Southern. However, investors can still expect a rebound as news continues to trickle in about how likely the deal is to go through. 

Kansas City Southern’s robust bottom-line growth could significantly boost Canadian Pacific’s earnings, thereby boosting the stock price.