Why I'm Bullish on Canadian Pacific

Every once in a while on the moneygardener, I get the urge to explain why I like a certain company as an investment. The reasons why I own the stocks that I own for the long term are not as simple as past dividend growth or current low price to earnings ratios. I have specific qualitative, forward looking reasons for owning each and every stock that I own.

Right now, one stock that I am watching intently because I want to add to my position is Canadian Pacific (CP). I was not as interested in CP when it was trading at C$86.00 back in July of 2007, but now that the stock is trading below C$40.00 I believe CP is ripe for an attractive long term investment. So other than the reasonable valuation, why am I so bullish on Canadian Pacific?

Well, it is a fairly simple thesis; Asian economic growth should be the story of the next 50 years, Canada is flush with resources, and railroads are a boring monopolistic way to play this growth.

Consider this, CP holds a significant market position in the transportation of bulk commodities, which account for a large portion of the company's revenues. Grain, coal, and fertilizers accounted for about 43% of CP's freight revenue in 2007. As a comparison, automotive related products only accounted for 7% of CP's freight revenue.

Over the next 50 years Asia will require a whole whack of coal for steel production and loads of fertilizer and grain for food production. Canada happens to be a prime source for these materials. I see this trend of growing Canadian exports of these materials to Asia as a given and CP will inevitably be a large beneficiary of this growth as they transport from West to Far East.

I own CP shares and I will be looking to add to my position on any weakness in share price in the upcoming weeks, months, and years.

Comments

[bbowen7:]

I agree with the basic thesis, but would prefer Canadian National which has a better network (Trans-Canada and the old Illinois Central Gulf), and the best work practices in the North American rail industry.

Apr 16 01:20 PM

[wallyjm:]

union pacific also looks very attractive right now.

Apr 16 03:04 PM

[kk1:]

No mention of the Dakota, Minnesota and Eastern owned by Canadian Pacific? Once the DM&E extends their line into the Powder River Basin coal region, profits will come pouring in--considering that only two railroads now serve the PRB--and it is their most profitable business....

Apr 17 12:16 AM

[auto44:]

Good comment and as I recall it has better numbers.


On Apr 16 01:20 PM bbowen7 wrote:

> I agree with the basic thesis, but would prefer Canadian National
> which has a better network (Trans-Canada and the old Illinois Central
> Gulf), and the best work practices in the North American rail industry.

Apr 17 08:09 AM