As 2 Railroad Stocks Derail, 1 Could Speed Ahead

Feb.29.12 | About: Canadian Pacific (CP)

Canadian Pacific Railway (NYSE:CP) has been on the rise since its double bottom in October last year, and shares recently hit the highest price the company has had since at least 2008, and possibly ever in the company's history. What investors are wondering is if this trend will hold, and if so, for how long.

The company has been doing so well; in fact, that it just announced a quarterly dividend of $0.30, with a 1.6% yield on outstanding common shares. To me, the dividend is a sign that CP is confident in its future financial stability, since it can generate enough cash flow to pay out this dividend.

CP also just handed out a grant to the University of Alberta and Montana State University to carry out research into bear protection. I take this as another sign of financial confidence and stability. The people at CP are acting like they know that their company is comfortable and they appear to be implying that they have enough money coming in that they can give some away to a good cause.

With sunny skies on all horizons, is there any need for concern? A lot of major shareholders are putting pressure on the company to cut costs wherever possible, so the people in charge decided that it might be a good idea to change employees' pension plans to make the much less secure. Unsurprisingly, workers are not happy with this, and the union has been up in arms to hold onto its rights.

Thousands of employees are poised for a strike beginning in May if the dispute cannot be resolved before then. Meanwhile, investor activist Bill Ackman has been trying to convince CP to appoint his nominees to the board of directors, which could be creating some disarray behind the scenes that investors are not privy to.

It's hard for me to imagine that the recent accident in Wisconsin, where a boy was hit by a train and killed, will have much of an impact on stock value. Since it seems to have mostly been caused by him not paying attention to what was going around him, very few people will look negatively on CP as the responsible party, in my opinion.

The same cannot be said for CP's competitor, Canadian National Railway (NYSE:CNI), Canada's largest freight train company. With its stock already leveling off, the company will not be welcoming the news of the U.S. National Transportation Safety Board's decision to place the blame on Canadian National for a 2009 derailment that left one person dead and seven wounded.

Nor will investors, I expect. No one wants to put money into a company with such lax safety procedures that lives are lost and equipment damaged when it could have been prevented. The cost and public reputation that comes from this sort of thing could be enough to push Canadian National's share price down. I would recommend selling off ownership in this company, although over the long term, it will probably swing around again.

CP stands to gain from Canadian National's misfortune. As investor's pull out of the bigger company, the chances are good in my view that they will be dropping that money into another railroad stock, and CP looks like a promising option right now.

At the time of writing, CP has been selling for more than Canadian National, and it looks to me like that gap will increase over the next few weeks. Even though Canadian National has managed to scoot higher than CP, I don't believe that this advantage will hold, especially as bull investors start boosting CP and people lose confidence in Canadian National.

The highest share price in this group belongs to an American company, Union Pacific Corporation (NYSE:UNP). It is currently selling at around $111, a full $35 above CP and Canadian National's respective prices. Judging by the trends, however, I would predict that Union Pacific's value is about to drop off again, leaving CP to rise up.

One reason that I expect Union Pacific's price to drop is its derailment in Minnesota last Monday, especially since the company's cleanup operation continues to appear in the news, which keeps the accident in the public's mind. Like Canadian National, I think that this accident will reflect badly on the company.

The bottom line is that out of these three, only CP remains perceived as guiltless in its accident. Because of this state of affairs, I really believe that railroad investors will be best off moving their money over to this company, since the fate of the other two does not look so hot right now.

Although CP has a much smaller market cap than its two competitors, it is still one of the largest railway companies in the world, and its value stands at almost $13 billion as I write. As Union Pacific tries to pull itself together, and Canadian National makes airports angry by making it difficult to come to an agreement, CP could be positioned to potentially capture a portion of their market share.

As long as it can come up with a satisfactory contract for its employees so as to prevent a strike and maintain quality work by keeping them happy, I believe that CP's upward trend is going to continue for quite a long time.

That being said, a part of me can't help but wonder if the dividend is a sham, that is, a way to make investors believe the company has more financial stability than it really does. This seems unlikely, though, because all other factors point to a healthy growth scheme for the next year that should keep CP well and strong.

A quick look at investor psychology indicates to me that people are ready to buy into CP right now, and I think they are right.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.