2012
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E. Hunter Harrison - Date/Photographer unknown.
24 September 2012
CP The Last Great Rail Turnaround
New York New York USA - Wall Street analyst William Greene of Morgan Stanley Research North America is telling investors in the rail
sector that Canadian Pacific Railway, under the direction of newly appointed chief executive E. Hunter Harrison, "could be the most compelling railroad
investment opportunity for the next three years."
"We are resuming coverage of CP at Overweight and adding it to Morgan Stanley's Best Ideas list," says Greene. "CP is one of the cheapest rails
on 2014 and 2015 growth. While CP looks expensive on current sell-side consensus, we believe consensus significantly underestimates the pace at which CP can
improve margins and earnings. The stock is cheap on a price/earnings to growth ratio basis."
Green notes that Harrison's track record of operating ratio improvement at Illinois Central and CN "led to impressive stock performance. In the case of
CP, we believe the stock has further to go, as we are 18 percent ahead of consensus for Fiscal Year 2013... and we see upside to US$128 by year-end 2013. We
forecast CP to realize a 72 percent OR in 2013, with a clear path toward a mid-60s OR by 2015."
Greene says that Morgan Stanley "does not subscribe to the view that CP is uniquely challenged such that a mid-60s OR is improbable, a point we expect
management to address at CP's 5 Dec 2012 Investor Day. Our work shows that closing the productivity gap with CN is likely to be a major driver to OR in
Harrison's first two years on the property."
Morgan Stanley's Investment Thesis on CP: "As indicated when activism began, the turnaround at CP has the potential to be the most significant
investment opportunity in railroads for the next three years. The arrival of Hunter Harrison should catalyze change on a network that is certainly not broken
and arguably has strong potential. While we acknowledge that key man risk and weakening macros are concerns, we see significant opportunity for OR improvement
at CP with non-economic drivers to growth and productivity." Morgan Stanley says its Best Ideas are "leading stock investment insights, the best
combination of highly differentiated research, favorable risk-reward profiles, and clear catalysts."
William Vantuono.
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Vancouver Island British Columbia
Canada
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