Canadian Pacific Rail (CP.TO)

Valuation has come off a lot. They are doing the right things. They are streamlining the speed of their networks up. Thinks US economy continues to grow and he has taken advantage of the dip in the valuation data position. Dividend yield of 0.82%.

It is valued on the basis of things like market share, the rail business overall and growth potential. Crude by rail is a growth area. He thinks we saw a peak earlier this year. It is not a massive growth industry. Rails are a lot more economically sensitive. Baltic dry freight rates are the lowest they have been in 30 years. This will be a headwind for these guys.

(Market Call Minute) Prefers CNR-T unless they buy Norfolk Southern.

It was very interesting that this would go up 6% today on what he would consider to be a stink bid. He doesn’t think Norfolk Southern (NSC-N) is going to accept their bid, and doesn’t think anybody else thinks they are either. If the bid does get accepted, it is going to be a long 18-24 month regulatory approval process.

Technically if he had to choose between this and Canadian National (CNR-T), he would choose CNR. CP has a lot of the resource side of the equation in it, and he is not sure that we have put a bottom in this yet. It depends a lot on commodities and how much shipping we are going to have.

This almost tracks the same as the transports in the US. A lot of the rails have corrected. We have had a sort of Bear this year and it is coming to an end. Expects it will break out and go higher. Thinks you will be okay with this.

They guided down. They said the outlook was cloudy over the next 6-12 months on weak crude by rail and coal. With lower Operating Ratios, a lower CapX, asset sales and buybacks, he still has this modelling at 70% EPS growth over the next couple of years. If this holds true, then EPS in 2018 will still be almost double what it was for 2014. A lot cheaper than Canadian National (CNR-T). Still a little bit of a premium towards US comps, but it has a very powerful Cdn$ advantage over them.

Has been a darling ever since that whole management shakeup when they put in Hunter Harrison, who has done a marvellous job taking the operating ratio down to levels that passed original expectations. He can’t explain why the stock has come off the way it has. It may be that it is just an excess of selling or shorting. He is looking at this with interest. It has good growth, a balance sheet that isn’t quite as strong as Canadian National (CNR-T). Multiples are a little bit high at what they trade at historically.

Feels that the Hunter Harrison halo effect has gone away to some degree. There has been some pressure on the shipping of oil by rail also. However, the infrastructure for the longer-term is in place. A large part of this has to do with the global growth expectations. Unless economic growth is really going to jump up, he wouldn’t see the ability for them to push through pricing increases.

He prefers Canadian National (CNR-T). Canadian Pacific had a little bit of a Hunter Harrison valuation baked into it. The stock has been growing into that valuation slowly, so the shares have been underperforming.

He does not have exposure to rails at this time. They are economically sensitive. Right now the markets have a bleak look on the economy. He prefers CNR-T to CP-T for their North American footprint and the fact that it is exposed to the US.

This has been a roller coaster. There was some really strong performance in 2014, and it was getting way ahead of itself. There has been a pullback in the whole transportation sector. This one stumbled in Q2. Didn’t meet expectations. The sector has come back a lot. Fundamentally, the P/E ratio for the last 5 years has been about 19, and is currently trading at about 18.4. Seasonally the transportation sector tends to do well starting in October, so this is a good time to start taking a look at the railways. It may start a little bit late because of the overall drag of what has happened with the whole commodities sector passing through. Starting to look like a good opportunity.

There is a big drop in crude by rail. Thinks it is going to continue to be challenging for the next little while, because there are some refineries shutting down for regular maintenance. A very well-run company. The company has been buying back a lot of stock. This is so tied to the commodity cycle, coal and economic activity he just doesn’t think it is a kind of thing that you need to be involved in at this stage.

This is one he is paying attention to. Had sold his holdings way too early. They cut their revenue guidance and it is trading at about 20X this year’s earnings. He can buy others such as CSX Rail and Union Pacific and Canadian National at a much cheaper valuation. Wouldn’t buy at these levels.

This sector, both in Canada and the US, has been underperforming and is actually diverging against the broader S&P 500 or the TSX. It is struggling to keep the prior support level of around $200. A little dangerous looking, but will probably find some support sooner or later. He wouldn’t enter the stock.