Canadian Pacific Railway: Part 1 - Strong Upside Potential

| About: Canadian Pacific (CP)

Summary

CP sold the Arbutus Corridor to the City of Vancouver for $55 million, plus revenue sharing.

The wind energy market in Canada has demonstrated a five-year average growth rate of 23% per year.

The wind energy sector in the US supports more than 50,500 full-time jobs.

Canadian wheat consumption and exports remain strong.

The current decreased value of the Canadian dollar will keep Canadian wheat exports bullish.

Canadian Pacific Railway (NYSE:CP) [TSX:CP]

Introduction

This article provides a market analysis for a long-term investor in Canada Pacific Railway. That being said, with a recent $55 million asset sale, a growing wind energy market, and consistent revenue through grain transportation, CP provides a long-term investor with a strong potential upside.

Company Overview

Canadian Pacific Railway is engaged in rail transportation throughout Canada and the Northeast and Midwest regions of the United States (US). More specifically, CP provides freight transportation services, logistics solutions, and supply chain expertise. Currently, the company has a market cap of $25.5 billion, EPS of $8.4, and an annual dividend of $1.40 CAD. Click to enlarge

Source: Yahoo Finance

Asset Sale

The sale of the Arbutus Corridor to the City of Vancouver will provide CP with $55 million and future revenue sharing. A boon to CP's upcoming earnings reports, on March 7, 2016, the company sold the Arbutus Corridor to the City of Vancouver for $55 million. The Arbutus Corridor is a nine-kilometer stretch of land located in Vancouver's west side. In line with the terms of the sale, CP will share any future proceeds with the City of Vancouver on any future development and/or the sale of pieces of the corridor.

Energy Market

As global enterprises turn towards reducing their carbon footprint and going "green", CP's coal market can be offset by its growing wind energy market. Moreover, because industrial sized wind turbines stretch to 191 meters (626 feet) when assembled, the large rotor blades and other parts must be loaded by crane and put onto modified rail cars for transportation. Thus, to grow with the wind energy market across North America, CP has dedicated a fleet of 70-tonne, 89-foot flat cars with 15-foot clearance to transport the wind turbine parts. Most importantly, in regards to CP's wind energy market and the Canadian Wind Energy Association (CANWEA), the wind turbine industry in Canada has demonstrated a five-year average growth rate of 23% per year.

Overall, CP's revenue through the transportation of wind energy infrastructure is correlated to the overall health of the wind energy market in North America. Having said that, wind energy in Canada has grown from 137 MW in 2000 to 11,205 MW in 2015.

Source: CANWEA

Source: CANWEA

In a deeper analysis of the wind energy market and in line with CANWEA, 5% of Canada's domestic energy needs are met by wind. Specifically, wind energy in Canada is derived from 259 wind farms and 6,066 wind turbines. In fact, there will be another 1,000 MW of wind energy added to Canada by the end of 2016. As a catalyst to the wind energy market in Canada, national investment in the sector has grown year over year since 2009.

Click to enlarge

Source: Clean Energy

In regards to the health of the wind energy market, statistics from Clean Energy Canada show that there has been a steady increase in the number of wind energy jobs. Precisely, there has been an increase from 250 jobs in 2009 to 1,000 jobs in 2013.

Source: Clean Energy

Keeping focus on the health of the wind energy market, a 2014 report from the American Wind Energy Association (AWEA) concluded that the wind energy sector in the US supported more than 50,500 full time jobs. In consensus with the US Energy Information Administration (EIA), wind capacity grew by 13% in 2015 and is forecasted to increase by 9% in 2016 and by 8% in 2017. Ultimately, in 2017, wind generation in the US will account for 5.6% of the total generation of energy.

Source: EIA

In line with the Global Wind Energy Council (GWEC) and keeping in mind the special requirements for wind technology transportation, the following regions are seeing growth in the utilization of wind energy:

  • New government initiatives in India will be adding 5 GW a year of wind energy for the rest of the decade and on to the next.
  • In line with preexisting contracts, the Brazil wind sector will be adding another 12-13 GW of wind energy over the next five years.
  • Overall, Latin America will be adding 25 GW of wind power in the next five years.
  • Through 2019, Africa will be adding 13 GW of wind power.

Click to enlarge

Source: GWEC

Globally, wind power has increased from 17,400 MW in 2000 to 432,419 MW in 2015.

Click to enlarge

Source: GWEC

Overall, the increase in wind energy across the globe is a net positive to CP's wind energy transportation market.

Bull Market Sector - Grain

A key part of CP's revenue stream is the transportation of grain and wheat. Having said that, the company has utilized its network of railroads to be positioned in the heart of the grain and wheat producing regions of North America. The strategic positioning of CP's railroads allows the company to efficiently deliver grain and wheat to different regions of North America and to waterfront ports for international export.

Click to enlarge

Source: CP

Analyzing the above graph, CP remains in a unique position to mass transport grain across North America and to the world. More specifically, farms, the main source of grain, are located in the Midwest regions of Canada and the Mideast regions of the United States. Unfortunately, because the grain sources in Canada are limited to the Midwest region, they are distantly apart from other provinces, territories, and ports for export. This is also true for grain sources in the US. Thus, because the grain sources in both regions are distantly apart from other provinces, territories, states, and waterfront ports, the only feasible way to mass transport grain is via rail. For that reason, and because of the constraints for new railroad companies to enter the sector, CP remains in a unique position to acquire long-term revenue from mass grain transportation.

In deeper analysis, CP's wheat transportation market can be correlated to the overall health of the wheat industry in North America. For example, if the wheat industry in Canada is selling an increased volume of wheat, it will have an increased need for transportation. That being said, since 1960, wheat-producing regions in Canada have been exporting a larger volume of wheat to international customers in Europe, Asia, and Africa.

Click to enlarge

Source: Index Mundi

Canadian consumption of wheat has been increasing. Thus, if Canadian wheat consumption is increasing, the volume of wheat being transported is increasing. Precisely, in line with index mundi, Canadian wheat consumption has increased from 4,256 MT in 1960 to 9,000 MT in 2015. The increase in Canadian wheat consumption can be correlated to the organic population growth in Canada.

Click to enlarge

Source: Index Mundi

Source: Google

Similar to Canada, wheat consumption in the US was bullish from 1964 to 1999. On the contrary, since 2000, wheat consumption in the US has plateaued. Nonetheless, wheat consumption in the US remains steady, and with an increasing US population, wheat consumption may break out and become bullish.

Click to enlarge

Source: USDA

The current decreased value of the Canadian dollar will keep the Canadian wheat exports bullish. That being said, because of the decreased Canadian dollar, Canadian wheat products are more competitive from the buyers'/importers' stand point. For example, for a buyer in Asia, and at the current Canadian dollar value, purchasing Canadian wheat would be cheaper than purchasing American wheat.

Click to enlarge

Source: Wheat Growers

Global economic development in both Indonesia, Bangladesh, and other developing nations will keep Canadian wheat exports bullish. In line with CP's wheat transportation revenue, both of the economies in Indonesia and Bangladesh are improving and acquiring more Canadian wheat. In fact, because of their improving economies, both regions are facing a dietary shift towards more wheat-based foods. The dietary shift towards more wheat-based foods is growing because of the growing diversity in fast food vendors that are appearing in the regions that require wheat for buns and breads. Also, regions in Africa that consume large volumes of chicken are stimulating Canadian wheat exports because the chickens are being fed by Canadian wheat.

Conclusion

A long-term investor in CP should look out for increased government and private investment in the wind energy market because it will stimulate the company's correlated revenue. Also, an investor in CP should look out for economic improvement in developing countries because it will catalyze the consumption and transportation of Canadian and American wheat.

Disclosure: I am/we are long CP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.