National Bank Lowers CP Rail Target, Recommends We Buy Rails In August

With the steam taken out of a potential buyout bid, National Bank Financial analyst David Newman became the latest to return his target price on Canadian Pacific Railway Ltd. (CP) to pre-takeover levels.

Shares in CP were trading at C$91 a share just a month ago after Canada’s second largest railway acknowledged it had rebuffed a takeover bid by Brookfield Asset Management Inc. (BAM). The stock price has since tumbled by roughly 20%.

“Beyond the current turmoil in global capital markets, we believe the take-over premium built into CP shares has quickly deflated,” Mr. Newman said in a note to clients.

He reduced his target price on the stock to C$80 from C$95 given the reduced probability of an acquisition by Brookfield due to the current credit crunch in the markets and critical statements from management about the bid.

“CP’s strong fundamentals, industry leading buyback (10%), strong [free cash flows] and potential to generate other cash (asset sales) should continue to surface value,” Mr. Newman said.“Also, buy the rails in August for the fall rally.”

CP 1-year chart