Monday, May 21, 2012

CP turnaround: How soon, how strong?

Written by  Luther S. Miller, Senior Consulting Editor

Now that Canadian Pacific Railway is under new management, how soon can shareholders expect to reap the rewards promised hedge fund investor William Ackman during a long proxy fight?

"Investors must be patient," suggested Dahlman Rose & Co. analyst Jason H. Seidl, a Railway Age contributing editor, in an investor's note.

He went on to say: "We believe Pershing (the hedge fund) will attempt to implement significant changes at Canadian Pacific to improve the operating ratio (OR), which came in at 80.1% in 1Q12 and 81.3% in 2011, a year plagued with unusually severe weather especially in CP's network. Pershing Square Capital's OR target is 65.0% with the activist investor's CEO candidate Hunter Harrison admitting such a target would take years to achieve. Our OR assumptions are 77.0% and 75.9% for 2012 and 2013, respectively."

Seidl added: "Our model calls for 13% and 9% revenue growth in 2012 and 2013, respectively, with EPS growing 43% and 29% for the respective periods."

Seidl pointed that that CP shares have increased nearly 70% since Pershing Square purchased its first big stake in CP last September. Class I shares generally (including CP's) increased less than 30% in the same period.