On today’s TSX Breakouts report, there are 51 stocks on the positive breakouts list (stocks with positive price momentum), and 15 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list, yet is trading at a meaningful discount relative to a main industry peer due to a looming potential strike by its workers. However, this uncertainty over a potential deal being reached may present long-term investors with a buying opportunity. Discussed below is Canadian Pacific Railway Ltd. (CP-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Calgary-based CP Rail is a North American railway providing rail service across Canada and the United States.
In the near-term, there is a negative overhang for the stock – strike fears. On May 25, the company announced that members of two unions, the Teamsters Canada Rail Conference – Train & Engine (TCRC) and the International Brotherhood of Electrical Workers (IBEW), rejected the company’s contract offers.
Meanwhile, industry and company fundamentals appear to be positive.
Weekly U.S. rail traffic data released by the Association of American Railroads (Aar) has been strong. The most recent report released on May 23 stated, “Total carloads for the week ending May 19 were 261,273 carloads, up 1.2 per cent compared with the same week in 2017, while U.S. weekly intermodal volume was 285,142 containers and trailers, up 5.9 per cent compared to 2017 and the third-highest week ever….Canadian railroads reported 83,575 carloads for the week, up 8.3 per cent, and 70,974 intermodal units, up 4.4 per cent compared with the same week in 2017. For the first 20 weeks of 2018, Canadian railroads reported cumulative rail traffic volume of 2,932,441 carloads, containers and trailers, up 3.2 per cent.”
After the market closed on April 18, the company reported first-quarter earnings results, which were in-line with expectations. Adjusted earnings per share came in at $2.70. up 8 per cent year-over-year and a penny below the Street’s expectations. The operating ratio improved to 67.5 per cent, up 1.9 per cent from the same period last year. In the earnings release, the President and Chief Executive Officer Keith Creel provided an encouraging outlook stating, “With the extraordinary winter weather behind us, we built a tremendous amount of momentum through March - one of our best months in recent history - positioning us well for the rest of the year.”
On the earnings call, Mr. Creel reflected on the solid quarter, “I’m very proud of the commitment shown by the men and women at CP, who worked tirelessly through the quarter to enable us to move 6 per cent more volume than last year, which drove a 4 per cent increase in revenues and 8 per cent earnings growth in the quarter. Operationally, in spite of the weather challenges, our operational efficiencies continue. We were able to deliver improvements in both train weight and train length as well as a 3 per cent improvement in fuel efficiency. I’m encouraged by the momentum the team has built up through March and early April… and as John will detail shortly, our demand environment remains very robust, [and] that several of our lines of business are moving at or near-record volumes.”
On the call, chief marketing officer John Brooks discussed the positive pricing environment, “I am very encouraged around where I’m seeing pricing going, and I can tell you, I just did a snapshot of April so far on our renewals and it’s about 3.8 per cent on the renewals here over the last few weeks. There’s a whole lot of quarter yet to play out, but it’s certainly moving in the right direction.”
Returning capital to shareholders
The company pays its shareholders a quarterly dividend of 65 cents per share, or $2.60 per share on a yearly basis. This equates to an annualized dividend yield of 1.1 per cent.
In May, management announced a 15.5-per-cent hike to its dividend, raising its quarterly dividend to its current level of 65 cents per share up from 56.25 cents a share.
In addition, the company has been active in its share buyback program. The company completed its recent share buyback program that started on May 15, 2017 and ran through to May 14,2018. During this time period, the company repurchased 4,384,062 shares at a weighted average price per share of $214.31.
Analysts’ recommendations
The stock is well covered by the Street by both Canadian and U.S. firms. There were 28 analysts that provided research reports on this company after it reported its quarterly earnings, of which 18 analysts had buy recommendations, nine analysts had hold recommendations, and one analyst (from EVA Dimensions) had an ‘underweight’ recommendation.
Revised recommendations
A few analysts made relatively minor revisions to their expectations after the company reported its quarterly earnings results, several changes are listed below.
Walter Spracklin, the analyst from RBC Capital Markets, increased his target price to $258 from $256. Matthew Reustle from Goldman Sachs tweaked his target price lower to $262 from $265. Kevin Chiang from CIBC Capital Markets lifted his target price by $7 to $270. Benoit Poirier from Desjardins Securities lowered his target price by $1 to $253. David Tyerman from Cormark Securities raised his target price to $225 from $220.
Financial forecasts
The Street is forecasting earnings per share of $13.02 in 2018, rising nearly 12 per cent to $14.54 in 2019.
Financial expectations have been relatively steady, down ever so slightly. For instance, four months ago, the consensus earnings per share estimates were $13.12 for 2018 and $14.58 for 2019.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 16.6 times the 2019 consensus estimate, in-line with its five-year historical average multiple of 16.5 times. Over the past five years, the stock has traded at a forward multiple of between 12 times and 22 times, suggesting there is room for multiple expansion.
Shares of CP Rail trade at a meaningful discount relative to its industry peer, Canadian National Railway Company (CNR-T), which is trading at a forward P/E multiple of 18.7 times. CP’s valuation discount compared to CNR has expanded in recent weeks perhaps due to concerns about a potential strike at CP Rail.
The consensus one-year target price is $255.11, suggesting the share price may increase nearly 6 per cent over the next 12 months.
Insider transaction activity
Year-to-date, there has only been one transaction in the public market reported by an insider.
On January 25, James Clements, Vice-President – Strategic Planning and Transportation Services, exercised his options and sold the corresponding number of shares (1,200) at an average price per share of approximately $230.22, eliminating his portfolio’s position.
Chart watch
The stock has been in an uptrend since the start of 2016, gradually making higher highs and higher lows. Year-to-date, the stock price has rallied 5 per cent, in-line with its peer Canadian National Railway.
In terms of key resistance and support levels, there is initial overhead resistance around $250. Looking at the downside, there is strong support around $230, close to its 50-day moving average (at $229.87). Failing that, there is support around $220, at its 200-day moving average (at $220.04).
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty