Canadian Pacific Rail (CP.TO)

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.

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.