Canadian Pacific Shares Charge Higher As Raymond James Upgrades To Strong Buy

Early Tuesday, Canadian Pacific Railway Limited (USA) CP pre-warned investors its second quarter financial results, to be announced on the morning of July 20, are expected to bring EPS of approximately ~$2.00, which would imply a year-over-year decline of 18.3 percent. Management attributed the weakness to lower-than-expected bulk volumes, “impacts associated with Alberta’s recent wildfires, and the strengthening Canadian loonie.”

In a report issued Wednesday, Raymond James analysts Steve Hansen and Daniel Chew pointed out that, while they had been aware of the aforementioned problems for a few weeks, they had “clearly underestimated their full quarter impact, particularly on the cost front.”

Having said this, and acknowledging guidance for the second quarter look quite weak, the analsyts believe it's mostly rear-view looking and highlighted the following issues:

• 1) The second quarter saw a sharp upturn in traffic toward the end of the period
• 2) Transitory second quarter costs are expected to fade
• 3) Raymond James analysts think that “the ‘bulk-pendulum’ is poised to swing in favour of new tailwinds emerging in 2H16 (i.e., potash, US grain, CDN grain).”

Taking all of this into account, the firm decided to trim its 2017 estimate and, consequently, it target price on Canadian Pacific, from $210 to $200. However, the experts “regard the recent pullback in CP shares as an opportunistic entry point for long-term investors (currently trading at 13.1x 2017E).” Thus, they upgraded the stock from OP2 to SB1.

Shares of Canadian Pacific Railway traded up more than 3 percent on Wednesday, driven by Raymond James’ upgrade.