Canadian Pacific Rail (CP.TO)

CP-T vs. CNR-T. CP-T’s model price is $191.20, bang on its market price. CNR-T is cheaper, model price is $101.80, or a 25% upside. Buy CNR-T at $72.65.

Owns Canadian National (CNR-T) and has been thinking about lightening up a little. Had always thought CP had gotten a little ahead of itself. Also, they keep getting off on these tangents of takeovers. He likes the rails. They are basically economy stocks, and have been showing growth. Feels they are reasonably priced right now.

This has just completed a reverse head and shoulders pattern, which is a bullish indicator. Seasonality on railroads is January 20 to May 18, which implies that you do have some time for this one.

Decided that they can’t make a deal for Norfolk Southern (NSC-N). Too many regulatory hurdles and the board was not in favour of a deal. Buying CSX (CSX-Q) would be an easier deal for the regulators to approve because of the size and the territory it covers. However, it would run into much the same kind of obstacles.

CP-T has the north/south lines and CNR-T has the east/west and north/south. Hunter Harrison has turned things around. The efficiency ratio is gotten way down. Mergers and acquisitions would be fended off. A merger is probably not in the cards right now. Own CP for the growth over time of the company. All the rails are expensive right now.

Pipelines move most of the oil going to market. The rail companies picked up incremental capacity, but that production has come off dramatically. CP-T’s volumes have come off. CNR-T is outperforming CP-T

This is a call on “no recession”. One of the risks is volume, particularly crude by rail and coal. If you were to take their crude by rail and their Teck Resources (TCK.B-T) to zero, which probably won’t happen, the stock would still be very cheap relative to its 10 year. This is a name with a lot of shock absorbers built in. A lot of bad news has already been built in. Sees it growing at 11.5% next year and the year after. If they can acquire Norfolk Southern (NCS-N), that would be accretive for them. Very cheap relative to Canadian National (CNR-T). They still have pretty good Cdn$ tailwinds. He can see this going to $210. Dividend yield of 0.81%.

Very east/west in geography, and is looking to extend down more into the US, which is why it makes sense for them to acquire Norfolk Southern (NSC-N). They have a higher cost base, so if they spread that over an acquisition they become a bigger beneficiary. Not a bad place to hide. Being more Canadian, it is a little more exposed to energy, grain and a slower economy. Prefers the geography and lower costs of Canadian National (CNR-T), which he owns, along with CSX Corp. (CSX-Q).

If they acquire other railroads, all of the stocks are excessive from a historical point of view. It would be in the best interests of the shareholders of those companies to let CP-T acquire them. If it does not work out, then those companies have downside risks to their share prices.

Canadian Pacific (CP-T) or Canadian National (CNR-T) and oil? All of the excitement on this one was crude by rail which was where a lot of their growth came from. The multiples got hit pretty hard when oil came off, and they had to back away from that part of their growth. CNR was hit by this as well. Both rails benefit from being widely diversified and they both have great operating ratios. If oil turned around, he would expect that both would participate, but this one a little more so.

Canadian National (CNR-T) or Canadian Pacific (CP-T)? Very similar, but this has had the better of the run of the 2 and has now come back down. However, right now CNR looks like the one he would rather have. Seems to be less volatile and a little more of a straight run. A bit more of a “steady Eddie” going up, and now sort of plateauing, ready to make the next move up.

Versus Canadian National (CNR-T), he is paying close to 4X book on CNR, and 5.5X on CP. This company has to earn a much more substantial ROE for all other things to be equal. He is not just looking at ROE, but also at total returns, including dividends. They have both pulled back considerably from their highs, but that has been because of a weakening economy. He still looks at CNR as the benchmark railroad in North America.

Prefers Canadian National (CNR-T) and their US exposure from when they bought Illinois Central. This one has a lot of commodity exposure.

Hasn’t owned the rails in recent years, because he felt they were running way ahead of themselves. At the end of the day, railroads have got to reflect what is happening in the general economy and he thought that the price run ups that were happening were in excess of that. Between the 2 rails, he would prefer Canadian National (CNR-T). It gives you a more integrated North American network.

He bought about 6 months ago. He thinks it is now a good entry point. The multiple is telling you there are overhangs. E.g. Coal and Oil. They are making a bid for NSC-N because they think they can bring down costs and push revenues higher. CP-T is the best North American railroad. He also owns NSC-N, however he thinks there still may be some downside risk to that one.