Canadian Pacific Railway Ltd.CP

Morningstar Rating

Stock Research and Analysis

by Keith Schoonmaker

There's a lot to like in Canadian Pacific, and we believe the firm has room to improve its profitability. The railroad hauls an attractive mix of freight rich in intermodal traffic and bulk commodities that exhibit noncyclical demand, such as grain, Read more

Bulls Say

CP's mix is attractive because demand for products it hauls should prove to be resilient. CP earns about 70% of its revenue hauling intermodal, coal, grain, and fertilizer and has low exposure to cyclical automotive and forest products (6% and 5% of sales, respectively).

During the last five years--the rail renaissance--CP has improved its operating performance. Safety, operating ratio, and fluidity measures are all trending in the right directions.

CP holds an exclusive seven-year contract with Canpotex to haul all Saskatchewan potash. Global demand for this crop-growing necessity has recently accelerated, and with three years remaining in the deal, CP stands to benefit.

Although we think regulatory resistance would be nearly insurmountable, CN's track locations make it an attractive merger target for either of the big Western U.S. railroads, Burlington Northern Santa Fe BNI or Union Pacific UNP.

The purchase of the DM&E line gives CP additional U.S. assets and access to Midwest ethanol markets. By making a significant investment, the line could be extended into the coal-rich Powder River Basin. Read more

Bears Say

Heavy reinvestment requirements persist in railroading. Unlike trucking firms, railroads must purchase and maintain their road. On average, capital expenditure consumed 18% of CP's revenue during the last five years.

CP is exposed to risk of profit-constraining regulation in two nations. In Canada, westbound grain is subject to a revenue cap that may constrain CP's top line, given its high exposure to grain.

Carrying Elk Valley metallurgical coal generates more than 10% of total revenue. Although the volume is attractive, this represents significant customer concentration, and because CP's contract ties rates to market prices of coal, upside is constrained.

CP is exposed to some nonoperating risk in the form of its investments in asset-backed commercial paper. Recently the firm took charges to adjust these investments to estimated fair value. Read more

Strategy

CP focuses on maintaining a safe, fluid network. The firm hauls a mix high in bulk commodities and intermodal traffic, and it is expanding its industrial segment in Alberta heartland operations, near Read more

Management

Overall, Canadian Pacific has excellent corporate-governance policies. We appreciate CP's annual director elections and majority independent board. We also like the fact that performance options issued to executives vest only upon the firm's achieving Read more

Profile

Canadian Pacific is a CAD 4.9 billion railroad operating 15,500 miles of track across most of Canada and in the Midwestern and Northeastern United States. CP is the second-smallest Read more

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