Canadian Pacific Rail (CP.TO)

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.

TCK.B-T is pulling back on coal shipments, announced today. You have a lot of time before you buy into CP-T. It is very expensive. He admires management and had a positive oil market work in his favour. Commodities are starting to work to their disadvantage now. He is very cautious on the stock. Now is the time to take your profits if you held it over the last few years.

It looks like in the near term the rails are going through a rough period. Canadian rails have benefited greatly from carrying oil to the US. As the price of oil has come down, there hasn’t been as much shipped. This is a short-term thing and the rails are probably underperforming in the near term. In the long term, he still likes them. Prefers Canadian National (CNR-T), but this is a fine company.

Canadian rails? He is neutral on these. These are economy stocks and are somewhat cyclical. He is a little concerned that oil shipments have slowed down, so you may see earnings going kind of sideways. On that basis, an 18 multiple is probably too high, and perhaps should be down around15. We may have to wait a few more years before another cycle starts.

The rail sector is a good buying opportunity here if you are long-term oriented. The pull back is related to lower commodity prices. He is buying CNR-T and UNP-N. You can’t really go wrong here.

Canadian National (CNR-T) or Canadian Pacific (CP-T)? Given his positive outlook on the US and Canadian economy’s, rails are a great place to be looking 03-5 years. Canadian National is the cheaper of the 2, but this one has done a grand job.

Just had their earnings yesterday and he boosted his target price $5 to $250 even with weaker crude by rail, a lower Cdn$ and coal. Management is competent. They can double their earnings per share by 2018. He sees them earning $17 in 2017. Which puts them at a 14.1X PE. The only concern he has are possible regulatory issues.

This has some pluses and minuses. The minuses would be that a lot of the rails have benefited from the boom in moving energy around, which may slow down a little bit. However, the cost of energy is lower than what it has been.