Canadian Pacific Rail (CP.TO)

Crude by rail is clearly here to stay, especially as long as the pipelines do not get built. He expects pipelines will get built eventually and crude by rail will slow down but doesn’t think they will disappear. This is pretty richly valued and feels there are better names to own in this space, especially in the US.

Even at these lofty levels, he still sees more upside beyond margin consensus to Operating Ratios. Thinks ORs can come in below 65% if revenue growth remains in the 7%-8% range. With their excess cash flow on this quarter, he feels they could fund a buyback. Trades at a half a point premium to Canadian National (CNR-T) but due to their visibility and these positive catalysts, he thinks you can buy this. The time to buy it is somewhere here when you have concerns about the impact of weather to Q4.

(Top Pick Jan 3/13, Up 58.46%) Glamorous. It is the smallest of the big rails. If commodities turn around then this is not the finish. He thinks it still has legs. After 4 or 5 years the CEO will have to go because CRA will tax him on his global assets.

Way overpriced compared to CN. 17 times earnings next year is just too high. CNR is his railroad of choice.

Costs have fallen. Operating ratio is close to 65%, which is close to CNR. A much more profitable rail. The price contains all the earnings growth so he would not be buying it here but if it pulled back he would be interested.

(A Top Pick (Short) Aug 22/13. Down 21.95%.) Actually ended flat on this trade. The period of seasonal weakness for this is from the beginning of August all the way to the end of September and then reverts into the period of seasonal strength so he covered his Short and went into the broad transportation industry sector and benefited quite substantially.

Management under Hunter Harrison has done a great job by cutting costs and improving margins. Their operating ratio targets have been achieved at least 2 years ahead of schedule. Now at a multiple premium to Canadian National (CNR-T).

Rails have done brilliantly but he doesn’t know at what point they get a correction. This one is getting a little expensive.

$137 model price, 2.5% upside, but it will follow along EBV+5, so a year out it will be $149, so that would be your target price. Try to get it on pullbacks. CNR has a model price of $124.27, 13.5% upside, same story as CP.

It is time to sell. It is very fully priced and time to take profits. Canadian Rails are much more expensive than US. Would need to see a pull back of 5-10% to get into CNR. CP would need to come back to 16 times earnings. Prefers CSX and NSC railroads in the US.

Pershing (Square Capital Management) wants to sell some of its shares so there is a large overhang. This quarter, revenues could be a little bit light because of weakness in coal and grain. Revenue per ton mile was down 1% in September due to lower grain shipments. He sees EPS growth of 32% over the next 3 years given OR (Operating Ratios) improvements. This quarter, you could actually see ORs down 620 basis points, and you could have a pop from that. He would be using weakness to accumulate.

Chart looks like it has had some pretty good support at around $120. If it breaks below $120, all the moving averages are really tight. Often when you get this convergence, it is usually an indication that we move higher but periodically can be an indication that it actually goes lower. Stochastic is at an exceptionally high level, close to 100. You can pick this up at $120.

Trading at a higher multiple of earnings due to the fame of Hunter Harrison. As they continue to build value into the company, is it likely it will experience PE compression over time, or will they be able to maintain that high multiple of earnings? So far he is doing a great job, so multiples will expand or contract based on their success going forward. If they can continue to execute, the multiple can continue to expand a bit. Rails have been a little choppy in the last little while, so the group does not have quite the same tailwind that it had. This one, with very heavy exposure to moving commodities, is fighting a headwind.

Should we use Put Options to cover this stock? He prefers using Options when they are event driven. He would want to see a real reason to put it on in a hurry and take it off in a hurry.

An interesting story but feels it is overpriced. If you own and have made good money, he would seriously consider switching out of this one and into Canadian National (CNR-T) or a US rail.