We remain encouraged by
) healthy performance backed by volume addition, safety and
efficiency, and cost metrics. Additionally, pricing above
inflationary levels (3-4% year-over-year growth) is expected to
aid revenue growth in 2012.
We remain optimistic on Canadian Pacific's freight segment
that will continue to support revenue growth in the upcoming
quarters. Despite the slump in utility coal volumes, the company
expects coal to remain a significant driver owing to its coal
transportation deal with Teck Resources Limited. 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 is expected to 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 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 bode well for earnings
growth.In the Grain segment, we foresee growth across Canadian
grain crop aided by growth in farming. We also expect continued
strong domestic intermodal shipment owing to truckload conversion
to rail Intermodal.
The company has assigned 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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