Canadian Pacific's Remarkable 4-Year Transformation

Barclays continues to recommend long-term ownership of Canadian Pacific Railway Limited (USA) CP, terming the recent guidance cut as a “rare stumbling block” given the company’s remarkable transformation in the past four years.

Barclays noted that Canadian Pacific offers “highest future growth potential of the North American railroads,” driven by continued margin expansion and some commodity recovery.

Canadian Pacific reported third quarter adj. EPS of $2.73, missing both Barclays estimate of $2.80 and consensus’ $2.79. However, the brokerage said the company is set to capitalize on potential higher volumes in the coming quarter, with its guidance for a mid-50s OR run-rate in the fourth quarter.

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In addition, Barclays believes the improving cash flow should continue to support shares, while about 85 percent cash conversion may draw increased investor interest in a late-cycle, low growth environment.

“[W]e believe today's bullish tone is justified given the earnings potential of volume growth into a tighter cost structure. With a valuation in line with peer rail stocks, we continue recommending long-term ownership of CP,” analyst Brandon Oglenski wrote in a note.

The analyst also raised his fourth-quarter EPS estimate to $3.37 and 2017 forecast to $11.85, while noting that “mix could be a key swing factor particularly if grain inflects as strongly as management hopes.”

At time of writing, shares of Canadian Pacific fell 1.91 percent to $147.46.

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