4 July 2011

Flood-Related Disruptions Worsening at CP Rail, Says RBC

Toronto Ontario - Mother Nature hasn't been kind this year to Canadian Pacific Railway Ltd., which has had to endure a number of weather and flood-related disruptions on its transportation network. And, according to RBC Dominion Securities Inc. analyst Walter Spracklin, things aren't getting much better as the dog days of summer arrive.
 
Since CP's investor day on 13 Jun 2011, he estimates that network disruptions have only intensified. At that time, CP Rail projected that the financial impact of flooding on second-quarter results would be similar to the same three-month period of last year, when CP's mainline was shutdown for 11 days.
 
Mr. Spracklin doesn't see that happening. "We have been tracking CP's customer bulletins both before and after the investor day and we believe the conditions have now worsened both in the severity and longevity of track outages (in the second quarter) and now significantly exceed network outages experienced last year," he said.
 
CP's main North-South line in southern Saskatchewan and North Dakota, for instance, had been out of service due to flooding since 20 Jun 2011. Other areas of the network have also experienced downtime in the second quarter, including several regions in the interior of British Columbia and in southwestern Manitoba.
 
He reduced his second-quarter earnings per share estimate by 10 cents to 70 cents. He also trimmed his third-quarter projections, believing the impact of disruptions will carry over into the summer months.
 
Upside:  This could all add up to some short-term volatility in the stock, but Mr. Spracklin maintains a positive long-term view and still rates CP as an "outperform."
 
"We believe any share price weakness presents a buying opportunity, as long-term industry fundamentals remain strongly in CP's favour." Among the reasons why, robust demand for bulk commodities, expected cost savings from better productivity, and sustained price and volume improvements.
 
Mr. Spracklin maintained a $72 price target.
 
Darcy Keith and May Jeong.