Analysts Cautious Despite Better Than Expected Earnings for Canadian Pacific Railway

The ongoing uncertainty around the North American economy continues to haunt the prospects for Canadian Pacific Railway Ltd. (CP), which reported a better-than-expected third quarter Tuesday.

David Newman, National Bank Financial analyst, raised his price target to C$66 from C$65 after the earning, saying he continues to believe in the long term investment potential of the rails.  He said the increased pricing power and the integration of its recently-acquired Dakota, Minnesota, and Eastern Railroad will provide near-term catalysts, but was hesitant about what might happen next year.

He said in a note to clients Wednesday:

With a 33% potential total return based on our current target price CP may be warrant an “outperform” rating.  However, we will wait for further details from CP’s Investor Conference on November 13 before considering an upgrade.

Avi Dalfen, Blackmont Capital analyst, was a little bit more cautious about what impact the economy will have CP’s earnings going forward.  While he expects a boost in the fourth quarter from the lag in its fuel surcharge and a late grain harvest, he was less optimistic the current economic downturn will have on the railway’s volumes.

He increased his 2008 estimates by C$0.24 a share to C$4.29, but lowered his 2009 outlook C$0.18 to C$4.50 a share on the expectation the downturn in the economy will lower its volumes by 2.5% next year.  He put a new price target of C$53 a share on the stock, down from C$56 and maintained his “hold” rating.

He said:

CP, though being the least exposed of all Class I rails to the U.S. economy, faces increasing risk of U.S. economic recession and its impact on the Canadian economy. Its acquisition of DM&E [Dakota, Minnesota, and Eastern Railroad] also increases capex requirements at a time of increasing economic risk.