TSX Commentary » Canadian Pacific Railway

Canadian Pacific Railway CP Q42009 Soft on Prices, but Strong Operationally

admin — Fri, 29 Jan 2010 19:17:29 +0000

Veritas Research: Canadian Pacific Railway (CP) – $54.41 – CP’s Q4: Soft on Prices, but Strong Operationally
Sell, Intrinsic Value Estimate: $51.70
In an otherwise very strong quarter, management’s guidance on price was less than inspiring. The majority of fourth quarter prices came in at 4%, however the final tally on price and mix was 2%. The decline was driven by the Teck contract, the Canadian grain rate settlement and fuel index adjustments. Veritas believes that barring improvements to the Teck contract, CP seems likely to achieve no better than 3-4% pricing in 2010. This is less than expectations and presents further downside to the current valuation. However, Veritas has reduced its intrinsic value estimate given the progress the company has made on other fronts and the likelihood that this quarter is a one time event. Nonetheless, pricing softness continues to be a key risk for CP. CP delivered very strong operating results in what is normally a tough quarter. Similar to Q3, fuel productivity was at record levels, up over 6% compared to last year. In this case, sequential changes have less meaning since the winter quarters are more fuel intensive. Labour efficiency was also strong, up from last quarter by over 5% and in line with expectations. Going forward this remains a key metric to watch as additional bulk business (coal and potash) will require more employees and train starts. Despite surprisingly strong results on cost management and the potential for increased FCF due to capex reductions, Veritas believes pricing uncertainty and the risk that CP’s bread and butter – coal and potash – surprise to the downside, handily offset the aforementioned positives. Veritas maintains its intrinsic value estimate and plans on following up in due course.

Canadian Pacific Railway CP Cautious Outlook Likely to Impact Near-Term Sentiment; Buy on Weakness

admin — Fri, 29 Jan 2010 19:16:28 +0000

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.

Canadian Pacific Railway Teck Coal Arbitration

admin — Tue, 07 Jul 2009 05:00:22 +0000

Canadian Pacific Railway Limited
Teck Coal Arbitration Complete

The CP and Teck arbitration has been completed. It is a one-year deal
expiring April 7, 2010 with the rate structure no longer tied to the price of
coal. CP expects to move 17.5-19.5Mt of coal during the contact and is
guiding towards $360M in revenue at the top end of the volume range.

Teck and CN have also negotiated an agreement to move coal to Neptune
Terminals with the contract expiring March 1, 2010. CN can move up to
3.5Mt (~15% of CP’s historical annual volume with Teck). It is the first time
Teck has a choice of rail carriers for coal exports from W. Canadian mines.

For the 2010 negotiations, with CN now a viable option to ship westbound
coal, we believe Teck is in a position to derive more competitive shipping
rates. We estimate Neptune could receive an additional 1-2Mt. Given its
leverage to Teck coal volumes, we would view this negatively for CP.

setting our 12-18 month price target at $48