By David Berman
Investors weren’t happy about Monday’s profit warning from Canadian Pacific Railway Ltd. (CP): The shares were down 2.9 per cent in afternoon trading on Tuesday, a day after the railway said that the especially harsh winter would affect its upcoming first quarter earnings. It now sees quarterly earnings between 12 cents and 22 cents, down from 40 cents last year.
If you’re thinking that railways should probably be able to withstand bad weather, you’re likely not alone. Perhaps this helps explain why CP has been a laggard among North American railway stocks in 2011 and over the past 12 months.
CP shares are down 3.5 per cent this year while Canadian National Railway Ltd. (CNI) shares are up 8.6 per cent, marking a sizable 12.1 percentage point difference. Among U.S. railways within the S&P 500, CSX Corp. (CSX), Norfolk Southern Corp. (NSC) and Union Pacific Corp. (UNP) are all in positive territory, with year-to-date gains ranging between 2.9 per cent and 21.8 per cent (CSX).
Over the past 12 months, CP also lags, with a gain of 14.5 per cent, putting it at the bottom of the pack. By comparison, CN is up 21.5 per cent and CSX is up 54.6 per cent.
What is one to make of this? Cherilyn Radbourne, an analyst at TD Newcrest, agrees that the first quarter “has clearly delivered an unusual number of weather challenges” for CP. But she is not entirely sympathetic. She maintained a “hold” recommendation on the stock, along with a price target of $76.
While she noted that the stock trades at a lower valuation than other railways (and CN in particular), based on estimated 2012 earnings, this isn’t sufficient reason to upgrade the stock.
“What gives us pause in upgrading the stock is our concern that Ed Harris’ brief tenure as chief operating officer may not have been sufficient to effect lasting change, and continues a pattern of frequent senior management turnover at CP,” she said in a note that also highlighted the series of weather-related setbacks on operating results.
“We are also concerned about CP’s inability to accommodate stronger than expected volumes of grain in the fourth quarter of 2010 and export potash in the first quarter of 2011. We would feel more comfortable in the context of evidence of renewed operational momentum.”