Cowen on CP: “No skepticism in a post-Hunter world”

Written by William C. Vantuono, Editor-in-Chief
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The late, now-legendary E. Hunter Harrison. Photo courtesy Colin McConnell/Toronto Star

“We have no skepticism in Canadian Pacific’s post-Hunter world, said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl in comments on Canadian Pacific’s Oct. 4 investor day and 3Q2018 preliminary results. “We are encouraged by CP’s opportunities in intermodal and grain, and believe that increased free cash flow will give management the option to raise the dividend or pay down high yielding debt. We raise our price target to $236.”

“At the investor day, CP highlighted its transition post-Hunter Harrison,” Seidl noted. “While respect was certainly shown toward the rail giant’s career and impact on CP as CEO, CP management, led by CEO Keith Creel, is successfully putting its stamp on this post-Hunter era, as evidenced by strong preliminary 3Q results. Creel emphasized that CP is now primed for further growth in intermodal and grain, with CBR (crude by rail) a third potential area.

“CP management highlighted a few reasons why its intermodal business is set up nicely, including the GCT Deltaport terminal going through a 50% expansion, CP’s network possessing [increased] capacity with longer sidings, brand new refrigerated boxcar fleets and 20% surplus capacity within existing terminals. Second, more efficient growth of its grain franchise is an emphasis for CP. With new [National Steel Car] grain cars (500 delivered thus far, with 500 more in 1Q19) able to fit 15% more grain within a smaller car profile, CP will be able to carry more grain and add more cars. In addition, CP has historically operated 7,000-foot trains, but with longer sidings now in place, CP can extend trains to 8,500 feet, which provides a second way to increase grain capacity (by 25%). Together, these two improvements will result in CP being able to move 40% more grain. Last, management echoed our belief in CBR as an opportunity for CP, although it also seemed to slightly downplay the product’s potential when it called CBR ‘part of the story, but not the story. We’ve made it a profitable, sustainable, revenue stream.’

“While he didn’t mention Union Pacific by name or directly address UP’s recent decision to adopt precision scheduled railroading (PSR), CP CEO Keith Creel did say, in his own words, that successfully executing PSR requires ‘intestinal fortitude,’ and companies to be fully invested in the initiative. He added that implementing PSR is replicable, but with the right management and the right culture. This is similar to when we wondered whether UP will need to add operational leaders to its team to be ‘all-in’ on PSR. CP CFO Nadeem Velani did note that UP adopting PSR is a positive for CP, since the more railroads using similar operating strategies, the better for the group as a whole.”

More tellingly, in the Q&A session concluding the investor day, management was asked about the possibility of further consolidation among the Class I’s. “Somewhat surprisingly, Creel answered that he believes a merger or acquisition is likely to occur, calling it a question of when—not if,” Seidl said. “Potential regulatory issues aside, M&A is ‘a compelling value propostion for customers, shareholders, and the economy,’ in Creel’s words.”

Editor’s Note: This of course is speculation, but we believe something major is in the works that will eventually result in two east-west North American transcontinental Class I railroads. Based on current route structures and combinations that will result in minimal overlap, we see CP+UP+CSX and CN + BNSF +Norfolk Southern as potential combinations, with north-south Kansas City Southern, including KCS de México, as the “wild card.” “Potential regulatory issues” may not be as large a factor, given the current Administration’s push toward less-stringent regulations. The upcoming mid-term elections, and whether they affect the current balance of power on Capitol Hill, may be a factor in any merger activities. Perhaps the late Hunter Harrison’s vision of transcontinental railroads will be realized posthumously. 2019—when Union Pacific will celebrate the 150th anniversary of the driving of the Golden Spike at Promontory Summit, Utah, and completion of the first transcontinental railroad—may be a milestone year for the industry. Undoubtedly, Hunter would be very happy seeing Keith Creel as CEO of a transcontinental Class I, which is well within the realm of possibility.— William C. Vantuono

Canadian Pacific President and CEO Keith Creel could eventually lead a North American transcontinental Class I.

Categories: Class I, Freight, News, Regulatory Tags: , ,