John KimCanadian Pacific RailCP.TOHOLDSep 25, 2019

All rails are suffering a recession, but is it over? Rails are cyclical to the Canadian economy. She feels were getting closer to a recession. She prefers CN to CP because of PE and dividend. CP's valuation reflects the Kansas City merger and its synergies, so higher. She owns no rails. She would buy CN on a dip.

Hit by tariff narrative, but tariffs didn't actually hit the fundamentals. Integrated nature of rails in NA means that tariffs are largely irrelevant. Could see some weakness during CUSMA negotiations, but long term it's been a mistake not to add on that weakness.

The KSU acquisition gives them an advantage with its entire North American footprint. Seeing signs that entire NA freight market is tightening. Industrial side of the economy seems to be doing well, much of it due to both fiscal and AI data centre spending in USA and Canada. 

Should benefit from higher commodity prices. At inflection point of strong quarterly results. A long-term hold. Yield is 0.92%.

He'd put $$ in CP for now. Generally, they move in the same direction. CP is more in the driver's seat now, realizing synergies from the KSU acquisition.

Likes UNP more.

Good long-term business. Geographic footprint makes it a great railway. He's still actively buying.

He'd be a buyer today, largely on valuation and where we are in the cyclical recovery. Volumes have been really tough. Industrial goods economy has been softer than thought. A lot of speed-dating has been going on in the rail sector, so the sector might be more condensed in future.

In the midst of ongoing trade discussions, near-shoring is where we're going. Only single line in NA that runs from Canada-US-Mexico -- this is a major win for efficiency. It also has east-west, which helps with Atlantic-Pacific trade. 

If energy prices are going to remain elevated, rails are much more competitive than trucking. Sector broke out in January, this pullback is a great entry point. Big cash-generating business, in early stages of a structural change. Yield is 0.83%.

Good long-term buying opportunity right now. Tariff concerns last year, with some pressure abated from SCOTUS ruling. Consider diversifying between both CP and CNR.

Whatever comes out of CUSMA will be positive, because at least there will be an agreement. It's the unknown that creates volatility.

Network is unrivalled, especially with the KSU acquisition. Still in early stages of those cost synergies. Only network that spans Canada, US, and Mexico. Strong business, strong executional track record. Well positioned going forward. Yield is 0.80%.

Two words -- freight recession. It's been going on for over 3 years, and manufacturing has been the cause (Covid pulled demand forward, and then people spent $$ on trips and concerts). ISM Manufacturing PMI spiked unexpectedly last week. This gives the rails easy comparisons. Both should do well as manufacturing recovers.

CNR trades at a discounted PE of 17.5x. This is your name for value. Yield is 2.7% -- a meaningful premium to its 10-year average of 2%. Earnings growth of 8% expected. He'd probably choose this one on valuation, and on its intermodal business mix.

CP trades at parity with the group. Trades at 21x PE. Yield is just under 1%. Not cheap, but expected to grow faster (13% compound earnings growth over 3 years). 

Owns neither, as trucking has way more cyclical leverage to a freight recovery.

He's pretty neutral on the rails. CP and CNR are fairly similar, both are economic bellwethers. Many think that the economy's going to be slowing down a bit. Great, long-term legacy companies. You'll make $$, but it won't be over the moon.

Doesn't own CN. CP's long term is great, but depends on tariffs and CUSMA which you can't predict. You have to ride it out. Abandoning free trade is silly and stupid, but there will be a resolution.

Prefers this to CNR, but doesn't know how all this tariff stuff is going to play out with CUSMA negotiations. Those are going to get nasty and ugly. Could be another shoe to drop with the railroads.

He actually prefers trucking to rails at the moment.

He likes the rails. It's a high-quality industrial with huge barriers to entry. The KC merger gave it synergy. It trades at a higher PE than CNR. Investors have rotated out of this into something sexier like Shopify. Is a solid grower. Buy at low-20s PE.

Sold earlier this year on uncertainty surrounding tariffs. Phenomenal business. Thesis of being an integrated NA railroad comes under a bit of threat with the tariffs. Medium-term growth would be affected, and a re-rating might follow. Valuation and growth potential didn't align. Still constructive on the business over the very long term.