Shares of Canadian Pacific Railways Ltd. climbed nearly 4 per cent in trading Wednesday on the headlines about the railway’s new streamlining and restructuring, despite some caution among analysts that demand for the stock may be getting ahead of itself.
The Street has been more than prepared for the improvements and new efficiencies announced this week. And now that the full details of the company’s restructuring are here, as announced late Tuesday by CP’s chief executive officer Hunter Harrison, some analysts have responded with muted satisfaction that railroad is meeting expectations.
Analyst Cameron Doerksen of National Bank Financial still rates CP stock “underperform,” noting that expectations for the company’s effective restructuring has already long raised its stock price. “CP’s targets are largely as expected and we believe that management and Hunter Harrison specifically have laid out a very credible plan...As such we see a turnaround in CP as largely priced into the stock at this point,” Mr. Doerksen said in research note Wednesday morning. His target price for CP stock is $84, with an “average” risk rating.
Throughout the fall, this has been the common theme among most company watchers. Yes, the prospects looked good for Mr. Harrison, a veteran railroad executive whose Tennessee drawl belies strong determination to turnaround CP. There have already been signs of streamlining, such as improving cross-continent intermodal container hauling, closing outdated switching yards and trimming the number of management jobs.
Yet, the big news of Canadian Pacific’s 4,500 job cuts over four years appears to have been treated as a fait accompli – a meeting of expectations, rather than a surprise to analysts.
RBC Dominion Securities’ Walter Spracklin sees some further opportunities though. “We see management’s changes to its prior targets as prudent and, in our view, increasingly realistic and achievable,” he said in a report. In particular, he noted how CP has softened targets for its operating ratio, a measure of operating costs as a percentage of revenue. Rather than specify a 65 per cent target in three years, Mr. Spracklin noted that CP is now gearing for a mid-sixties range in four years.
“We will be interested to see if the lower end to the guidance range is reflective of a more pessimistic outlook in particular business lines or simply reflective of a wider potential range of outcomes,” Mr. Spracklin said, hinting at more open-ended possibilities for the CP. His price target is $91 a share, with “average” risk.Report Typo/Error