CP Rail: Low-Risk Option for Global Exposure

When Canadian Pacific Railway Ltd.'s (CP) fourth quarter results beat analyst estimates on Jan. 29, 2007, and jumped more than 3.5%. It has risen more than $2 since, and closed at C$69.43 on Thursday. But Odlum Brown analyst Stephen Boland thinks it has more room to run given his C$85 price target and "buy" recommendation.

In a note to clients, he reminded investors that CP's proposal to buy Dakota, Minnesota, & Eastern Railroad Corp. (DM&E), the largest regional railroad in the U.S., is currently being reviewed by the U.S. Surface Transportation Board for approval. A decision is expected in the fall, but until then, CP's management has indicated that DM&E's results are coming in as expected, Mr. Boland said.

CP also maintained its outlook for 2008, which was previously announced in November. It calls for revenue growth of 4% to 6% and prices to rise 3% to 5%. Adjusted earnings are forecast to be C$4.70 to C$4.85 per share, which implies growth of 9% to 12%, he added.

While the analyst likes CP's prospects in the very near term given its exposure to global growth, he is nonetheless cautious, and thinks opinions of this exposure could be overly optimistic. Mr. Boland said:

We tend to be of the belief that it is quite likely that the global economy will cool more than most expect, and this is something that may not be priced into stocks exposed to global growth (unlike those with higher U.S. exposure, where the belief of recession is becoming increasingly common).

He does like the long-term outlook for North American railroads, as well as the long-term global growth story, and considers CP a low-risk option for those seeking this exposure versus other stocks.