A bargain stock for value investors

Calgary-headquartered Canadian Pacific Railway operates a rail network that links the Pacific to the Atlantic coasts of North America, crisscrossing Canada as well as the northeastern and midwestern U.S. In a June 21 report, two analysts said the stock at $160 made it a bargain blue chip stock.

When it comes to Canadian Pacific Railway Limited (TSX─CP; NYSE─CP), investors ought to sit up and take notice because the company sports a valuation that is simply too cheap to overlook.

In their June 21 report Desjardins Capital Markets analysts Benoit Poirier and Charles Perron-Piché upgraded the company’s stock to ‘buy’, kept their conservative estimates and talked up the transcontinental railway’s bargain basement stock valuation.

In addition to upping their stock recommendation, the analysts keep their “average” risk rating and lowered their 12-month target price for CP to $195 a share from $204.

The revised price target is a function of assumptions that include, but are not limited to, aggressive cost-cutting measures and aggressive stock buybacks.

The company recently announced a lower-than-anticipated earnings outlook for this year as a result of anemic bulk commodity volume, the strong Canadian dollar and the negative impact from wildfires in northern Alberta.

However, it maintained its projection for earnings per share (EPS) expansion in the double-digit range since ongoing cost-reduction initiatives and an expected volume recovery in the second half should offset the second quarter shortfall, say the analysts.

A stock for value investors at a bargain basement price

They add that overall, despite reducing their estimates, they believed the shares are too attractive to ignore at current levels.

Messrs. Poirier and Perron-Piché say that Canadian Pacific now projects that its revenues for the second quarter of 2016 will drop 12 per cent year-over-year to $1.45 billion. The analysts had projected $1.597 billion and consensus had expected $1.559 billion.

The company also projects second-quarter adjusted EPS of $2 compared to Messrs. Poirier and Charles Perron-Piché’s forecast of $2.51 and the consensus of $2.45.

As for positive developments slated to materialize in the second half of 2016, Messrs. Poirier and Perron-Piché say that noteworthy initiatives include reducing the size of its employee base and reducing share-based compensation.

The analysts add, “While we remain cautious on the market environment, we believe current levels underestimate Canadian Pacific’s ability to adjust its cost structure and buy back shares to protect earnings per share.”


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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