CP offers top potential rail return, analyst says

VOLUMES KEY

a sales slump — a different kind of challenge from the ones Harrison tackled. The former CEO, who left to run CSX Corp., whipped Canadian Pacific into shape by cutting costs and speeding up service, turning a perennial laggard into a top performer.

“Volumes are the next step,” Josh Duitz, who holds Canadian Pacific shares as part of the $1.4 billion he manages at Alpine Woods Capital Investors in Purchase, N.Y. “If you get good volume growth, earnings are really going to start increasing.”

Creel, 48, is targeting percentage growth in the high single digits for adjusted pershare earnings in 2017, which would top last year’s two per cent gain. His forecast assumes an increase in volumes, in sharp contrast with last year’s 3.9 per cent drop in carloads. He’s off to a slow start. Canadian Pacific’s carloads were unchanged this year through the first nine weeks, trailing the three per cent increase for major carriers, according to data compiled by the American Association of Railroads.

The new CEO, who took over Jan. 31, is counting on a rebound in bulk commodities, which accounted for about 45 per cent of sales last year. Grain, the biggest business line, and potash are poised to climb, said David Tyerman of Cormark Securities.

Boosting revenue with existing resources “is the key to driving additional operating margins,” Creel said in a presentation last month. “Train length matters, train weight matters, train miles matter. And speed matters. Speed is critical to the whole thing. The faster they turn, the fewer you need.”

Creel declined to provide additional comment on his plans, said Marty Cej, a spokesman for the railroad.

Canadian Pacific has the top consensus recommendation among North American railroads and the highest per centage of “buy” recommendations from analysts. It’s poised to return almost 10 per cent in the next year, best among peers, according to data compiled by Bloomberg. Canadian National Railway Co., the country’s biggest railroad, is expected to fall one per cent.

That would be a turnabout from the past 12 months through Friday, when Canadian Pacific’s 19 per cent gain trailed the 24 per cent advance of its main rival. Both companies beat the 16 per cent gain of Canada’s benchmark S&P/TSX Composite Index over the period. Canadian Pacific fell 0.44 per cent on Monday, closing at $199.37 in Toronto.

Canadian Pacific’s price as of Friday is 17.4 times projected earnings in the next year, the lowest ratio among major North American carriers excluding Kansas City Southern. CSX, buoyed by speculation over Harrison’s arrival as CEO, is now the continent’s most expensive large railroad stock with a P/E ratio of almost 24. Canadian Pacific Railway’s new CEO Keith Creel will need to reverse a sales slump to capture the upside of the company’s potential growth.