We remain encouraged by
) healthy performance backed by volume addition, safety and
efficiency, and cost metrics. Additionally, pricing above
inflationary levels and higher fuel surcharges are expected to aid
revenue growth in 2012.
We remain optimistic on Canadian Pacific's major freight segment
that will continue to support revenue growth in the upcoming
quarters. Despite the slump in utility coal volumes, the company
expects coal demand to remain a significant driver with
contribution from its coal transportation deal with Teck Resources
Canadian Pacific is also restructuring its portfolio by
replacing the short-haul U.S. thermal coal with long-haul
metallurgical coal and has also secured new businesses for shipping
Powder River Basin (PRB) through the Ridley Terminal.
In Industrial and Consumer products, growing demand in the oil
and gas market should bode well for the company's Bakken and
Alberta oil sands transport business. Management expects the
Marcellus Shale natural gas production units and Alberta's
Industrial Heartland area, Canada's largest hydrocarbon processing
unit, to support the company's revenue and market share gains in
Further, Canadian Pacific's multi-year agreements with companies
like Unimin Corporation, Smart Sand, Inc. and U.S. Silica that deal
in the energy market also bodes well for earnings growth. In the
Grain segment, we foresee growth across Canadian grain crop aided
by the growth in farming. We also expect continued strong domestic
intermodal shipment owing to truckload conversion to rail
The company projected long-term investment of nearly C$2.3
billion for 2011-2028 with approximately $1.0-$1.2 billion slated
for this year. To benefit from the current boom in the energy
markets the company is building network for shipping frac sand,
pipe and construction material as well as other goods required for
oil and gas shale production. This would enable easy access to the
main production facilities and provide an opportunity to transport
large volumes to key shale regions.
However, we remain concerned about the prevailing economic
volatility in the U.S. and abroad that may keep Canadian Pacific's
top-line growth under pressure in the near future. Moreover, the
near-term growth for the company is expected to be tempered by
lower coal production.
Lower natural gas prices resulting in weak utility coal market
have raised significant concerns limiting overall coal shipments,
despite strong exports to Asian countries. In addition, weak U.S.
grain shipment due to volatility in feed shipments will remain
significant headwinds for the company.
Further, competitive threats from major rivals like
Canadian National Railway Company
), a highly unionized workforce, and regulatory pressures may limit
the upside potential of the stock.
Canadian Pacific currently holds a short-term (1-3 months) Zacks
#3 Rank (Hold). For the long term, we have retained a Neutral
recommendation on Canadian Pacific.
CDN NATL RY CO (CNI): Free Stock Analysis
CDN PAC RLWY (CP): Free Stock Analysis Report
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