CP Rail Shares May Drift Down Further, But Analysts Still See Takeover Potential

After second quarter earnings at Canadian Pacific Railway Ltd. (CP) were in line with consensus estimates, the stock took a 3.5% hit on Tuesday along with much of the market. They could head further toward the pre-takeover buzz price of $77 if investors feel the prospects of a takeover are low.

The company revealed last week that Brookfield Asset Management Inc. (BAM) approached it about a takeover earlier in the year. “We believe speculation may perhaps wane after comments made by various rail management teams and upon further analysis by potential suitors, unless a completely innovative, outside-the-box solution is found,” National Bank Financial analyst David Newman wrote in a note.

He thinks the uncertainties related to any “value-surfacing event” may be too great to overcome. They include the use of more leverage in a cyclical and capital-intensive business, access financing in credit markets, the potential requirement of government approval, future tax law changes and conflicts of interest that may arise with dividing a property company and an operating company.

Mr. Newman thinks CP shares could drift back to what he considers its fundamental value of around $80.50 per share. However, his price target remains at $95 based on a takeover analysis, since “there is always the potential for a transaction, given continued [albeit dampened] private equity liquidity, rail industry capacity for greater debt, a novel structure emerging, etc.,” he wrote.