15 November 2008
CP Keeping a Lid on Costs
Canadian Pacific Railway Ltd. is becoming more productive and
better at keeping a lid on costs, which bodes well for the the company's future even as times get tough, analyst Fadi Chamoun at UBS
said after listening to company management at its Investor Day Conference on Thursday.
While CP did not provide EPS guidance at the conference, "due to extremely low visibility on the economic outlook," Mr.
Chamoun says the company did share some of the key elements that constitute its business plan for 2009.
These include the outlook for volume, pricing, capital spending, productivity, and free cash flow.
"Overall, the company's outlook for each of these earnings drivers was either in line with, or better than, our forecast,
"Mr. Chamoun says. "The way we see it, CP Rail's operating ratio declined from 79.8% in 2003 to 75.3% in 2007 and then
increased to 79.3% in the first nine months of 2008," he says in a note to clients.
Reasons for this increase include inefficient fuel recovery mechanism and the slow implementation of cost reductions in response to
declining volumes.
However, such trends are now reversing," Mr. Chamoun notes. "Productivity initiatives are expected to deliver $100m in cost
savings, fuel is moderating, and the recovery mechanism is being enhanced."
He adds that he believes his 2009 EPS estimate can be achieved despite a 4% projected decline in volumes.
CP expects to deliver $100-million in cost savings over the next two to three years through various efficiency
initiatives.
Management also noted that new contract pricing growth is averaging 5%-6% and already secured for 50% of CP's book of
business in 2009.
Mr. Chamoun is maintaining his buy rating on the shares, along with his price target of $77, based on 14x forward
earnings.
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