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Planes, boats, trains . . . and capital gains

Dionne Warwick yearned for planes and boats and trains to bring her lover back home to her. The MoneyLetter [1], alas, has little interest in such romantic yearnings. Our yearnings would more likely be unkindly compared to those of say, a gold digger. (Alas, that is what we’re paid to do.) Here are three transportation stocks to buy for capital gains.

Capital_GainsIn the three months to March 31, airline stock Air Canada (TSX—AC) reported an adjusted net loss of $52 million, or 19 cents a share. This beat an adjusted net loss of $63 million, or 23 cents a share a year earlier. The better results are confirmed by better first-quarter cash flow.

President and chief executive officer Calin Rovinescu notes that the first quarter is “historically the most challenging of the year for airlines in Canada”. Even so, he notes that: “We generated record first quarter passenger revenue of $3.5 billion, with traffic growth of 11.4 per cent outstripping a capacity increase of 8.6 per cent.”

In 2018, AC is expected to earn $2.72 a share. This would represent a drop of nearly 34 per cent from last year’s profit of $4.11 a share. Despite lower expected earnings, the shares trade at an attractive forward P/E (Price-to-Earnings) ratio of 8.5 times. Next year, AC’s earnings are expected to jump by over 45 per cent, to $3.95 a share.

AC has raised its earnings per share growth by buying back its shares. In the year to May 30, the airline repurchased and cancelled 2,559,836 shares. In the year to May 30, 2019, AC can buy back up to 24,040,243 shares. Even so, we expect it to buy back far fewer shares that authorized. Last year the airline repurchased only 11.4 per cent of the number of shares that it could have.

Canada’s largest domestic and international airline flies to over 200 airports on six continents. AC is among the 20 largest airlines in the world with over 48 million customers.

The consensus recommendation of five analysts is ‘Strong Buy’. We rate it a ‘Buy’ for share price gains. But only if you don’t need dividends.

Bombardier recovery continuing

Montreal-based aircraft and rail train manufacturing stock Bombardier (TSX—BBD.B) recently announced consensus-beating results for revenue, EBITDA, and EPS for the quarter that kicked off the year was. Revenue was $4.03 billion, EBITDA was $263 million and EPS were $0.01. AltaCorp Capital Managing Director Chris Murray had called for tallies of $3.88 billion, $295 million and a loss of -$0.02, respectively, while the consensus had called for totals of $3.88 billion, $268.3 million and $0.00.

The analyst, who sticks with his ‘Sector Perform’ recommendation but boosts his 12-month target share price by $0.50, to $4.50 from $3.75, adds that Bombardier’s management reiterated its previous 2018 outlook. The company continues to, among other things, concentrate on fast-tracking train deliveries.

“The company continues to make progress along its recovery plan with a number of positive catalysts coming, including the close of the C Series joint venture, which we believe should be supportive of new sales and margin improvements and a successful entry into service of the Global 7000,” says Mr. Murray. “As the company continues to reduce product and leverage risks, we see an opportunity for a positive response in share prices.”

Bombardier manufactures and sells transportation equipment worldwide.

CP invests heavily in grain transportation

Grain farmers, among others, were frustrated by poor deliveries from CP and CN. To speed up deliveries, the federal government passed the Transportation Modernization Act, which makes it far more attractive for the railroads to invest in new rolling stock.

Transportation and logistics stock Canadian Pacific (TSX—CP) has taken advantage of the new Act by placing an initial order for 1,000 new high-capacity grain hopper cars. President and chief executive officer Keith Creel said, “These new rail-cars will revitalize our fleet and help cement our status as an industry leader in grain transportation for decades to come.” In fact, CP generates more revenue from delivering grain than from delivering any other commodity.

CP expects 500 of these new grain hopper cars to enter service before the end of this year. What’s more, it plans to order 5,900 new hopper cars over the next four years. They will replace the old cars. The new cars carry more grain and can load up and unload more quickly. They’re also more reliable than the old cars, which will help move growing crop production across the prairie provinces.

CP’s earnings are expected to grow both this year and next. In 2018, it’s expected to earn $13.09 a share. This would represent earnings growth of 14.9 per cent. Based on this estimate, the shares trade at a P/E ratio of 19 times. This seems reasonable. The ROE is an exceptional 65.8 per cent. Next year, CP’s earnings are expected to grow by 12.3 per cent, to $14.70 a share.

CP keeps buying back shares. Since 2014, the railroad has bought back 35.32 million shares, adding to the demand for the stock, and dividing the earnings by fewer shares, thus raising earnings per share, and usually, the price.

CP remains a buy for further long-term share price gains and modest, but growing, dividends.

Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts, providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise. Its flagship transcontinental service provides the fastest and most consistent service between Eastern Canada, Calgary and Vancouver. It has access to a network of over 100 facilities across Canada and the US that enabled it to reach markets not directly served by rail.

This is an edited version of an article that was originally published for subscribers in the July 2018/First Report of The MoneyLetter [1]. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter. [1]

The MoneyLetter [1], MPL Communications Inc.
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