TSX Commentary

Canadian Pacific Railway (CP) – $54.41 – Cautious Outlook Likely to Impact Near-Term Sentiment; Buy on Weakness
Outperform, Average Risk, Price Target: $65.00
Q4/09 operating EPS of $0.94 (excluding f/x and special items) came in above RBC CM’s estimate of $0.91 (consensus $0.88), and below last year’s $1.07 (pro-forma the results of the DM&E). The main variance to RBC CM’s estimate was a lower tax rate of 22% vs. the 26% forecast. Management spent considerable time on 2010 headwinds and espoused a relatively cautious view on volumes. Even pricing renewals of 4% are expected to be negatively impacted in 2010. RBC CM believes that near-term sentiment will likely focus on headwinds rather than the operating leverage opportunity and this will put some pressure on the share price in the near-term. Despite the cautionary language, RBC CM considers the operating leverage opportunity to be highest at CP, driven by upside to product hauls in coal and potash. RBC CM considers understands that management’s language around these two segments is cautious, given the current uncertainty regarding the outcome of Teck Coal and Canpotex dealings. RBC CM notes that it is optimistic, however, regarding the outcome of these negotiations—it expects that resolution of either will be positive to the share price. Accordingly, RBC CM would be buyers of CP on weakness and is maintaining its Outperform recommendation. Management deferred major discussion on their outlook for 2010 to their June Investor Day on June 2nd-3rd.