Canadian Pacific Railway Ltd. has rebounded an impressive 33 per cent over the past five weeks, dipping only slightly after it released so-so third quarter earnings on Tuesday. However, RBC Dominion Securities analyst Walter Spracklin isn’t so sure the rip-roaring gains are going to continue.
Although he maintained an “outperform” recommendation on the stock, he lowered his target price to $66 – his lowest target on the stock in about 18 months – from $73. Put another way, he now sees a 13 per cent upside to the stock over the next 12 months (after factoring in dividends), down from 25 per cent upside.
His reappraisal comes down to a combination of lower expected earnings and a lower multiple as well. He now believes that CP will generate earnings of $3.25 a share in 2011, down from an earlier expectation of $3.38. He also reduced his earnings expectations for 2012 and 2013. And while he used to think the market would value 2012 earnings at a 15-times multiple, he has reduced the multiple to 14.5-times earnings.
So what are the problems with CP to warrant a 10 per cent haircut to the target price? Mr. Spracklin believes that attention will shift to CP’s operations and market share – neither of which is a sure thing amid an uncertain economy. As well, the U.S. grain market remains weak, which will have an impact on the amounts that CP transports.
“Overall, we believe that investors will likely take a ‘show me’ view on CP, particularly with regard to productivity and market share recapture,” he said in his note, released to clients on Wednesday. “The key is that if we see positive trends in the 2011/12 winter period, that would set the stage for positive investor sentiment in 2012, as has been our thesis.”