Canadian Pacific Still at Neutral - Analyst Blog

The persistent effects of inclement weather continue to hurt the operations of Canadian Pacific Railway Limited ( CP ), resulting in reduced shipments and higher operating costs.

Similar to its second quarter results, the company's third quarter registered declining service metrics that resulted in lower-than-expected results. However, we expect the company to bounce back in the on-going fourth quarter given strong improvements in service levels.

The company remains fully geared to deliver strong operational performance in the winter months backed by resource addition like locomotive, snowplows, switch heaters and headcounts. Additionally, pricing above inflationary levels targeting 3-4% year-over-year growth and higher fuel surcharges are expected to aid revenue growth in 2011, compensating for lower volumes.

Canadian Pacific is focused on upgrading its network capabilities that will enable running longer and heavier trains and deliver on-time performance. The company looks forward to upgrade and install new sidetracks in key areas in 2012 and increase train length by 11% on transcontinental routes in 2013. Additionally, the company projected long-term investment of nearly C$2.3 billion for 2011-2028, with approximately $1.0 billion for this year on infrastructural developments.

Over the long term, the company expects Coal demand to remain a significant driver of the company's growth. Apart from the Teck Resources deal, Canadian Pacific is also poised to gain from strong Asian demand for metallurgical in the Canadian and U.S markets. Further, the growing significance of intermodal service in domestic and transcontinental markets will also remain favorable for the company.

However, Canadian Pacific remains exposed to strong competition in the freight transportation market in Canada and the U.S., primarily from railroad companies like Canadian National Railway ( CNI ), which operates in almost the same network.

In addition, heavy investments in new locomotives, technology and fuel recovery initiatives failed to deliver strongly given continued weather disruptions in the third quarter. The company projects a cautious outlook on international intermodal business as it expects modest growth in retail sales on surplus capacity and lower inventory replenishment in the Asian market. Further, fuel price volatilities are also expected to weigh on the company's near-term results.

Consequently, we currently maintain our long-term Neutral recommendation on Canadian Pacific supported by the Zacks #3 (Hold) Rank.

CDN NATL RY CO ( CNI ): Free Stock Analysis Report

CDN PAC RLWY ( CP ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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