RBC Analyst Cuts Canadian Pacific Railway Price Target

A late harvest, the strike at Potash Corp., (POT) and mine and port shutdowns in the third quarter, are being blamed for lower-than-expected volumes in grain, coal and potash. Management at Canadian Pacific Railway Ltd. (CP) said these near-term factors should hurt its results for the quarter, as volumes are down 3.1% so far.

This has prompted RBC Capital Markets analyst Walter Spracklin to cut his price target on CP shares by C$2 to C$66. He noted that while oil has retreated from its July high, average prices for West Texas Intermediate [WTI] crude in the third quarter will still be up on a year-over-year basis when compared to the average of $75 per barrel last year.

RBC’s third quarter estimates also fall by 9% from C$1.23 to C$1.12, bringing Mr. Spracklin to the low end of the Street. The consensus is C$1.17, but the range is C$1.11 to C$1.24. He also reduced his full-year forecasts for 2008, 2009 and 2010, bringing those close to the low end as well.

In a research note after the RBC Transportation Conference on Wednesday, Mr. Spracklin said:

In terms of valuation, we expect CP’s share price to remain rangebound, as we believe the downward EPS revisions will depress forward multiples - at least until the company demonstrates evidence of a turn-around in operating and financial performance.

He sees few near-term catalysts, and maintained a “sector perform” rating on the stock. The analyst prefers Canadian National Railway Co. (CNI) with an “outperform” rating and C$60 price target.