Monday, May 21, 2012

CP turnaround: How soon, how strong?

Written by  Luther S. Miller, Senior Consulting Editor
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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.

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