When activist investor William A. Ackman announced his plans
Canadian Pacific Railway Limited
) shares earlier this week, the stock slipped significant with
shares trading as low as $124.47 on Tuesday. According to the
announcement, Ackman will reduce his ownership by selling around
7 million common shares, spread over a 12-months period,
beginning June. Is Ackman's announcement the only reason for the
slide or there is any other side to this story?
Ackman attributed the reason to his decision to reduce his
holding in the company to this substantial rise. In the press
release, Ackman stated that Canadian Pacific represents
approximately 26% of the combined assets of his funds. Given high
risk factors from the standpoint of portfolio management, it was
imperative to let go off some of his holdings.
Given the exponential rise in Canadian Pacific shares since 2011,
the stake reduction seems to be a strategic decision by Ackman as
it allows him to gain from the price appreciation (over 200%
since 2011). Ackman, the founder and CEO of hedge fund Pershing
Square Capital Management, L.P. bought around 12.2% stakes in
Canadian Pacific in Nov 2011, following which he introduced many
investment and strategic changes in the company that resulted in
significant turnaround in its market value.
One of his key strategies was to bring changes in management
including appointment of a new CEO. In Jan 2012, Ackman proposed
to replace CEO Fred Green with Hunter Harrison, who was the
former CEO of rival
). This decision was approved despite being highly condemned.
Following these changes, the company registered remarkable growth
in its share price. This growth was also supported by market
forces such as a downtrend in the truck market, price recoveries
and increase in crude by rail shipment as well as a rise in auto
production that acted as long-term catalysts. Overall, we can
conclude Ackman and his policies have worked in favor of the
company bringing it to new highs.
Having said this, we wonder that if portfolio readjustment is the
only reason why Pershing Square is giving up stakes in a high
potential stock, which tripled in its market value in past one
year. Canadian Pacific is experiencing financial growth from
volume addition, safety, efficiency and, cost metrics.
Additionally, pricing above inflationary levels (3-4% year over
year growth) is expected to aid revenue growth in 2013 and
Further, Canadian Pacific remains committed to generate an
operating ratio around 65.0% by 2016. Despite all these favorable
projections, we suggest that Ackman's stake sale could itself be
a possible indication to a downside risk to the company
Even if the significant growth going forward could not lure
activist, Ackman from holding up his position in the company, we
wonder what this could possibly imply for the general investors
of the company. Will the stock continue with the downtrend going
by current signals or will it bounce back based on its near-term
financial projections is something to wait and watch out.
CDN NATL RY CO (CNI): Free Stock Analysis
CDN PAC RLWY (CP): Free Stock Analysis Report
KANSAS CITY SOU (KSU): Free Stock Analysis
UNION PAC CORP (UNP): Free Stock Analysis
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Canadian Pacific, which operates with other players like
Union Pacific Corporation
Kansas City Southern
) carries a Zacks Rank #3 (Hold)