Two Canadian Pacific model AC4400CW diesel-electric locomotives - Date/Photographer unknown.

31 August 2012

Investors Urged to Go Long on CP Rail

Toronto Ontario - Canadian Pacific Railway Ltd.'s shares have jumped by more than 8 percent since its second quarter results in late July. But Turan Quettawala, Scotiabank analyst, is encouraging investors to go long on the stock with plenty of potential ahead.
 
CP's shares are currently trading at a higher multiple than their historical average [16.3 times projected earnings vs. an average of 15 times].
 
But Mr. Quettawala argues that in the past the railway's shares have reflected an optimism that was never fully realized. Under CP's new chief executive, Hunter Harrison, those aspirations may not only be realized, but exceeded, he argues.
 
Mr. Harrison remains confident that his goal of reducing the railway's operation ratio to 65 percent by 2015 is achievable. In the absence of further details, Mr. Quettawala said he is currently carrying a more conservative estimate of it achieving an operating ratio in the low 70s by 2015.
 
Even still, this led him to increase his price target to $90 a share, from $87 previously. He maintained his sector perform.
 
"The key here is that there is room for CP to outperform our estimates even if it doesn't get to 65 percent by 2015," he said.
 
But there are plenty of levers management could pull to drive additional value, including potentially selling off excess land around its yards, which Mr. Harrison has said are too large. Those funds could be reinvested in improving the railway, paying down debt, or by initiating a share buyback, Mr. Quettawala said.
 
Management may even consider the eventual sale of the franchise as a whole, he said. Although he doesn't expect it in the near term.
 
"We prefer to remain conservative in the absence of more concrete plans, which may come at the company's investor update in December," he said in a note to clients. "That said, we would be remiss if we did not point out that there is considerable upside potential to consensus earnings estimates if the operating ratio comes in closer to Mr. Harrison's targets."
 
"This could be a trigger for the shares," he added.
 
Scott Deveau.