Analyst: CP “on to another finish line with sweat and speed”

Written by William C. Vantuono, Editor-in-Chief
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Canadian Pacific Railway, under the leadership of CEO E. Hunter Harrison, is “raising the bar, again,” according to Cowen & Co. Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, who attended CP’s 2014 investor day.

CP’s highly anticipated 2014 investor day exceeded expectations in tone and substance, in our opinion, and the stock’s outperformance on Oct. 2 will likely prove to be a continuation of above-industry-average returns for investors for many quarters to come,” says Seidel. “Management kicked off the event with the launch of a new set of impressive financial goals and a strategy to achieve them. CP now aims to more than double its annual EPS over the next four years. Based on our 2014 EPS estimate at the time of the announcement, such earnings growth would represent a Compound Annual Growth Rate (CAGR) north of 19%. The top line target calls for $10 billion in revenue in 2018. This would translate to a CAGR above 10% based on our estimate at the time of the announcement. It would also represent an acceleration from the expected 8% revenue CAGR for the 2013-2014 period.”

To achieve these goals, CP “seems to be sticking to its apparent mastery of the delicate balance of cutting cost while at the same time growing the top line,” says Seidl. “Luckily for the company, management appears to have identified one answer to both quests: velocity. Indeed, by continuing to find ways to increase velocity, CP can effectively increase asset utilization, thus lowering capital and labor costs, while at the same time improving service to the customer, something that should be instrumental for volume growth. This concept is likely to be best demonstrated in energy (crude and frac sand) and domestic intermodal, where CP believes there is huge untapped potential to convert business from the highway to its network based on improved service, with velocity being its chief pillar.”

CP’s investor day affirmed Seidl’s “constructive view of CP” and “boosts our confidence in management’s execution ability and strategic vision even further.” As result, Cowen & Co. has raised CP’s 2015 EPS estimate to $11.50, from $10.80, “in order to reflect improved top line growth prospects, a better margin outlook, and the likelihood for a higher level of share repurchases. . . . We are raising our price target from $205 to $230, based on our new 2015 EPS estimate and a 20x multiple, which we believe is a better reflection of the company’s improved outlook and strong track record under the current management than our previous 19x multiple. While this is a little higher than CP’s historical five-year multiple of around 18x, such a historical multiple partly reflects the pre-Harrison era. As the company begins to deliver on its new financial goals, the multiple could expand further.”

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