Canadian Pacific's Pivot To Growth Will Take Longer Than The Market Thinks

Loop Capital Markets said in a note released on Friday Canadian Pacific Railway Limited (USA) (NYSE:CP)'s pivot to growth will take longer than the markets thinks. This along with the fact that the company's stock has come within 4 percent of its price target has prompted the firm to downgrade its rating on the shares of the company to Hold from Buy.

Hunter Hangover Impeding Pivoting To Growth

Analyst Rick Paterson said he thinks the successors to the company's former CEO Hunter Harrison need to mend some fences and try to pivot to a growth strategy, with the Hunter Harrison model suggesting an imbalance between operations and the commercial side of the business. The analyst believes it would take years for the company to figure it out.

Comparing h Canadian National Railway (USA) (NYSE:CNI)'s recovery to growth, the analyst said Canadian Pacific was focused on getting basic operations right, while Canadian National has been getting tighter with its customers with data sharing and trust building.

"...CP simply having a shorter route or modestly lower rate may no longer be sufficient, by itself, to win business in this environment. This could take a while," the analysts said.

Inexperienced Marketing Team

Loop Capital Markets noted that the company revealed in the first quarter call that two-thirds of the marketing team had less than two years of service with Canadian Pacific, and about one-third, less than 12 months. The firm believes it would take a while for the team to take on their counterparts at Canadian National and win.

"While some of these people no doubt have marketing experience at other railroads, we still expect it will be some time before this team really hits its stride and the quality of marketing approaches the quality of operations, achieving a better commercial balance for the organization," the firm said.

Lowering Estimates

The firm lowered its full-year 2017 earnings per share estimate slightly to C$11.39 from C$11.44, while the 2018 estimate was reduced notably to C$12.37 from C$12.70. The firm's skepticism concerning the company's market share prospects was offered as reason for the toned down forecast.

New Labor Deal Struck

The company recently announced a new labor deal covering 600 administrative and intermodal employees in Canada. The five-year contract with the United Steelworkers Local 1976 provides for a 2-percent increase per year, with an additional 0.5 to 1 percent increase in each of the fourth and fifth year depending on gains in revenue-ton-miles.

The company's CEO Keith Creel was quoted by Calgary Herald as saying he is working with the Teamsters Canada Rail Conference to replace contracts that expire at the end of the year and that he is "cautiously confident" he can avoid a strike.

The company's March quarter results released earlier this week showed a 20 percent decline in net income, hurt by lower foreign exchange gains, while adjusted earnings per share of $2.50 were a penny ahead of estimates.

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