Canadian Pacific Rail (CP.TO)

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.

Operating margins last quarter had a 600 basis point improvement. If he compares that to Canadian National (CNR-T) there is some room for further operating margin expansion, but we are in the later innings of that game. Lower energy prices is a positive. Oil shipments may decline, but they will pick up in other areas. Fairly valued at this level. Anything under $200, there is upside.

If Keystone is passed, will this hurt the rails? In all of their crude by rail estimates, they assume that Keystone goes through, so don’t let that hold you back. Crude is about 10% of their business. They have calculated that if crude falls by half, they actually will have better margins because of the better economy, and better top and bottom lines. This is a phenomenal rail company. Trading at around 17X 2016 estimates and is less than Canadian National (CNR-T) right now. He thinks this has upside.

The stock chart looks like it is tapping out here. He would think that with a slowing economy, this will be affected. Have done a great job of improving the operating ratio, but there is only so much you can do. Not a stock that he would be particularly attracted to right now. Doesn’t think it has a lot of wind at its back.

One of the drivers in Canada on the rails has been the shipping of oil. To see this continue, there will have to be some stalling on the new pipeline builds. Also, the pricing of services where they have the 2%-4% increase every year, which would have to continue.

This has longer-term visible growth with numerous drivers from the top line along with expense control. Management is looking for 81 initiatives to get the operating ratio down to the low 60s/high 50s. They are looking at a growing their top line through 2018. Dividend yield of 0.66%.