One of the leading Canadian Railroad, Canadian Pacific ( CP ) has recently announced it long-term strategy for train lengths and network expansion in 2012-2013.
In 2012, the company intends to upgrade and install new sidetracks in key areas to support increased train length. Further in 2013, Canadian Pacific plans to increase train length by 11% on the trans-Canada rail routes. Enhancement of network capabilities over the next couple of years remain concurrent with its goal of enhancing capacity, safety and service metrics as well as increase fuel efficiency of 1-2% over the long term.
Since 2008, the company's intermodal trains have grown by 40% to a length of approximately 12,000 feet. The longer trains have resulted in increased efficiency in terms of capital inputs and have enabled the company to tap potential opportunities in the rapidly growing rail freight market.
Further, we believe the company's decision to improve train length remains a key strategy given the emergence of new markets for rail intermodal services due to uncertainties surrounding truck freight. Additionally, the growth in export coal and potash shipments has propelled the company to expand its capacity via longer trains.
Over the years, Canadian Pacific has been making significant investments toward the advancement of rail services and continues to infuse more capital over the coming years. It expects a secured locomotive financing loan of $140 million at 3.88% for 15 years during the fourth quarter.
Additionally, the company projected long-term capital expenditures of nearly C$2.3 billion for 2011-2028 with approximately $1.0 billion in the current year. Apart from focusing on infrastructural developments, Canadian Pacific also looks to increase its headcount for an additional $25 million, to support service level accounting .
Although these initiatives look attractive for the long-term growth and provide competitive advantage to the company over railroads like Canadian National ( CNI ), which operates on almost similar tracks, we believe heavy investments in new locomotives, technology and fuel recovery initiatives overlooks the current economic outlook and stressed operating metric due to soaring fuel prices, paving way for distressed margin performance in the near term.
Consequently, we maintain our long-term Neutral recommendation on Canadian Pacific supported by a short-term Zacks #3 Rank (Hold).