Canadian Pacific Rail (CP.TO)

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.

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.