Canadian Pacific To Chug Along On Cash, Crude Catalysts; Goldman Sachs Upgrades

Canadian Pacific Railway Limited (USA) CP shares are undervaluing the existing cash flow base and upside to crude-by-rail through 2020.

The Analyst

Goldman analyst Matt Reustle upgraded Canadian Pacific from Neutral to Buy, with a $213 price target.

The Thesis

Canadian Pacific shares have underperformed its Rail peers by 4 percent and the S&P 500 Index by 9 percent, primarily due to less relative benefits from U.S. tax reform versus U.S. rail peers, Reustle said in a note.

The analyst believes the company is well positioned to exceed volume guidance in 2019, thanks to a supportive macro environment, competitor capacity constraints, and its existing spare capacity.

"We believe CP is well positioned to exceed management's 2018 guidance ("low double-digit EPS growth" versus GS estimate +20% yoy) driven by better-than-expected crude by rail volumes, potential market share gains from CN's network congestion, and late 2018 shareholder returns," Reustle said.

Goldman Sachs sees the company's free cash flow yield as attractive, given it's investing in growth opportunities such as the potential renewal of their aging grain fleet. The firm said shares undervalue growth potential from the capex program as well as upside to future share repurchases in the second half of 2018.

Overall, Goldman Sachs expects the improving operational dynamics throughout 2018 to support investor sentiment, helping to close in on the valuation discount it has with its peers.

The Price Action

Canadian Pacific shares are up about 20 percent over the past year and closed Tuesday at $178.71

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