A flooded rail line, location unknown.

27 May 2011

Flooding to Hit CP Rail's Earnings

Toronto Ontario - Severe flooding is expected to once again jam up Canadian Pacific Railway Ltd.'s earnings in the second quarter.
 
But Tasneem Azim, UBS analyst, is encouraging investors to keep a long-term view on Canada's second largest railway.
 
CP's management has indicated that the negative impact from flooding along the railway's network will likely drag on its second quarter earnings at similar levels to last year, or roughly 12 cents a share. Ms. Azim lowered her earnings forecast for the current quarter to 78 cents a share, from $1.06 a share previously, and consensus of $1, which she says is "too high."
 
She also lowered her price target on CP to $70.50 a share, from $72 previously, but maintained her "Buy" rating based on its current valuation.
 
"With [first half of the year] largely in the rear-view mirror, investor focus should return to CP's long-term earnings growth potential," she said. "As network operating conditions normalize we believe there is scope for volumes to stage a meaningful recovery."
 
She said CP's current valuation is not only attractive relative to its peers, but also in the context of her estimated annual earnings growth of 20% between 2011 and 2014.
 
In fact, the entire railroad industry is expected to see improved earnings over the next three years, said Walter Spracklin, RBC Capital Markets analyst.
 
"More importantly, we believe the railroads will use this free cash flow to significantly increase dividend payouts and share buy backs, in addition to investing in high growth opportunities on their network," he said. "We expect dividend increases to be key catalysts for multiple expansion and share price appreciation, which underlines our constructive view on the group."
 
Scott Deveau.