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Freight trains in a rail yard in Calgary (JEFF MCINTOSH/JEFF MCINTOSH/CP)
Freight trains in a rail yard in Calgary (JEFF MCINTOSH/JEFF MCINTOSH/CP)

Eye on Equities

Surprise executive departure prompts CP Rail downgrade Add to ...

Canadian Pacific Railway Ltd. shares have had a bit of a shaky start to 2011, currently trading nearly $5 below their peak in late January, as some analysts shifted their allegiance to rival Canadian National Railway on views it has the better prospects.

The ride isn't getting any smoother for CP this week, as the railroad announced that its chief operating officer Ed Harris is retiring after a short tenure. CIBC World Markets Inc. analyst Jacob Bout is concerned that his departure could derail CP's efficiency plans, and today downgraded the stock to "sector performer" from "sector outperformer."

"We believe the unexpected retirement of Mr. Harris increases the risk CP will fail to deliver on its operating performance targets," Mr. Bout said in a research note.

CP is targeting an operating ratio in the low-70-per-cent range within the next three to five years. "We believe Mr. Harris was spearheading much of the recent network efficiency initiatives at CP, and to that extent, the company's ability to achieve its targeted operating ratio was pinned on Mr. Harris," he said.

Mike Franczak, currently senior vice-president of operations, will succeed Mr. Harris when he retires next month. Mr. Harris, who joined CP in April, 2010, will act as an adviser through 2011.

Meanwhile, Mr. Bout noted that the poor weather conditions in early 2011 have affected CP's volumes and are trailing last year's shipments. If it doesn't make up for this volume in March, expectations for first-quarter financial results may have to be lowered, he cautioned.

Downside: Mr. Bout cut his price target by $4 to $74.

While demand for travel is recovering, the rising price for fuel is becoming an increasingly strong headwind for Transat A.T. Inc. , said TD Newcrest analyst Tim James. Heightened competition in sun destination markets and the appreciation of the Canadian dollar are also concerns, but he added that the company continues to trade at attractive valuations.

Downside: Mr. James cut his 12-month price target by $2 to $24 and maintained a "buy" recommendation.

Torstar Corp. posted solid fourth-quarter results, and despite structural risks in the industry, there's still "plenty of room" for further gains, said CIBC World Markets Inc. analyst Robert Bek. "With an under-levered balance sheet and a windfall coming from the CTV deal, a dividend bump is likely some time in the second quarter," he said.

Upside: Mr. Bek raised his price target by $1 to $15.50.

Extendicare REIT , operator of retirement and assisted-living homes, is forecasting improved funds from operations this year and in 2012 thanks to better-than-expected U.S. Medicare rates, notes CIBC World Markets Inc. analyst Alex Avery. The REIT trades at a discount to its peers, yet offers an above-average 7.9 per cent yield, he added.

Upside: Mr. Avery upgraded the trust to "sector outperformer" and raised his price target by $3.50 to $14.

The rise in grain prices bodes well for Cervus Equipment Corp. , an operator of heavy equipment dealerships in Western Canada that saw a 10 per cent year-over-year bump in tractor and combine sales in the fourth quarter, said Wellington West Capital Markets Inc. analyst Robert Winslow. The rallying prices provides "sufficient farmer optimism to offset the extreme wet Prairie weather of summer/fall 2010 that materially hurt production," he said.

Upside: Mr. Winslow raised his 12-month price target by $2 to $20, adding that he expects shares to hit $25 in two years.

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