31 January 2008
DM&E Deal Would Set CPR for the Long Haul
If Canadian Pacific Railway Ltd. clears a crucial regulatory
hurdle this fall, then investors can expect to ride a growth stock as the carrier wins the prize of hauling coal from surface mines in
Wyoming.
The trouble is, the deal's closing is far from certain. Last September, CPR signed a deal to acquire Dakota Minnesota & Eastern
Railroad Corp. (DM&E) for US$1.5-billion from a group of private equity investors.
Wyoming's Powder River Basin is already serviced by two U.S. railways, Burlington Northern Santa Fe Corp. and Union Pacific Corp., but
analysts say there's plenty of coal to go around.
Calgary-based CPR hopes to have regulatory approval for its purchase of DM&E by this October. CPR is trying to fend
off criticisms from the Mayo Clinic in Rochester, Minn., where activists are battling to keep the DM&E tracks from becoming a major
route for trains carrying coal from the Powder River Basin.
There is investor uncertainty about whether the U.S. Surface Transportation Board will approve CPR's purchase, which was completed last
October, placing DM&E into an independent voting trust.
But some analysts believe that the board will ultimately give the green light, meaning that investors willing to take on the
uncertainty today, stand to be rewarded this fall.
Yesterday, CPR stock fell $2.08 to $65.18. Shares in rival Canadian National Railway Co. dipped 77 cents to $49.55.
Tom Varesh, an analyst with Canaccord Adams Inc., upgraded CPR yesterday, in part because he believes that regulatory approval for
buying DM&E is in the offing. He maintained a "buy" on CPR, while raising his 52-week target price to $80
from $72.75.
Mr. Varesh noted that CPR's fourth-quarter profit, announced on Tuesday, exceeded analysts' estimates, and the railway's
2008 outlook calls for another record year, assuming a soft landing for the U.S. economy.
Walter Spracklin, an analyst with RBC Dominion Securities Inc., is tempering his enthusiasm for CPR because of the regulatory wait, and
also uncertainty over how many billions of dollars need to be invested by CPR to make Wyoming coal transport a reality and how long it
will take to complete the expansion.
Yesterday, he reduced his 52-week price target to $78 from $83. He lowered his price-earnings multiple on CPR
to 14 times instead of 15 times, based on a forecast of $5.53 a share in adjusted earnings per share in 2009. Still, Mr. Spracklin
rates CPR as an "outperform" with "average risk."
One potential trouble spot has been eliminated this year. CPR averted a strike that could have started this week.
"We like where we are and our job is to keep improving the quality of our product, so that we can add value and get a great return
on investment to justify continued expansion," CPR chief executive officer Fred Green said Tuesday, when he announced a record
$946-million profit for 2007.
In general, CPR has a lot going for it, said UBS Securities Canada Inc. analyst Fadi Chamoun. "CPR is highly exposed to the
growing global freight volumes and strong level of economic activities in Western Canada," Mr. Chamoun wrote yesterday in a report
titled "Franchise is in the Sweet Spot."
He maintained a "buy" recommendation and stuck with his 52-week target price of $80.
The past 13 months have been a roller-coaster ride for investors. At the beginning of 2007, CPR shares traded at $61.40 on
the Toronto Stock Exchange. A group led by Toronto-based Brookfield Asset Management Inc. sought to acquire CPR last April
in a leveraged buyout, but that plan was shelved in August amid a global credit crunch.
CPR shares hit a record high of $91 18 Jul 2007 at the height of takeover speculation, but then dropped steadily to a
52-week low of $57.30 on 22 Jan 2008.
The final decision to enter Wyoming could hinge on CPR bringing aboard project co-developers, even potential partners such
as Brookfield, because expansion costs could run as high as $6-billion.
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