Canadian Pacific demonstrates that the rail revival is not U.S.-centric

Posted Jun 5th 2008 11:44AM by Joseph Lazzaro
Filed under: Stocks to Buy

Readers of this space know that the railroad sector is one of the preferred sectors. After decades of unconscionable neglect, U.S. railroads are experiencing a resurgence, driven by international trade, commodities transport, and the rail's cost advantage over truck transport.

Further, the revival of the rails is not exclusive to one nation in North America. Canada also is seeing a healthy growth in railroad services and Canadian Pacific (NYSE: CP) is worth a review.

Analysts see 4-6% revenue growth for CP in 2008, in Canadian dollars, with grain, fertilizer and oil sands related shipment gains offsetting declines in forest products.

Another positive: analysts also expect CP to continue to improve rail system efficiency and fluidity, will overall better asset utilization

The above positives, combined with CP's strong free cash flow and modest pricing power make the company an acceptable investment for moderate risk investors. CP's modest p/e of 12 also tips the risk/return ratio to the purchase side of the scale. The Reuters F2008/F2009 EPS consensus estimates for CP are C$4.70/C$5.33. [Note: Currency figures are in Canadian dollars.]

The risks? Like other rails, Canadian Pacific is vulnerable to the economic cycle, hence a protracted global economic slowdown would hurt the company's results. Analysts are also monitoring CP's ability to continually improve rail system efficiency, fluidity, and operation, and its fuel costs.

Stock Analysis: Canadian Pacific is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from CP's shares. Sell / Stop Loss if you to purchase shares in this company: $54.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Tags: Canadian Pacific, commodities, CP, emerging markets, exports, imports, inthenews, railroad sector, trade