On today’s TSX Breakouts report, there are 22 stocks on the positive breakouts list (stocks with positive price momentum), and 24 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that may resurface on the positive breakouts list. Year-to-date, the share price has rallied over 18 per cent. However, with the recent market weakness, the stock price is down 6 per cent from its all-time closing high set last month. In October, the company reported record third-quarter financial results and raised its earnings guidance. As a result, a number of analysts upgraded their recommendations and raised their target prices. The stock now has 27 buy recommendations.
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.
After the market closed on Oct. 18, the company reported its third-quarter earnings results, which were well above the Street’s expectations. Adjusted earnings per share came in at $4.12, handily beating the consensus estimate of $4.06.
On the earnings call, president and chief executive officer Keith Creel summarized the company’s strong financial results stating, “. I’m very pleased with the results for the quarter, setting records across the board for the company, revenues up 19 per cent to $1.9 billion; the operating ratio, obviously, 58.3 per cent [a record low, down 270 basis points year-over-year from 61 per cent] That’s an all-time record for CP, certainly something we’re very proud of. Operating income improved 27 per cent to $790 million; and adjusted EPS [earnings per share], up 42 per cent year-over-year to $4.12 [from $2.90 reported last year]. Operationally, from a leverage standpoint, productivity standpoint, we continue to see train lengths improved to hit record levels. Fuel efficiency improved by another 3 per cent to hit a record of 0.916 gallons per 1,000 GTMs [gross ton-miles], which not only is a CP record but as well as an industry best.”
Given the strong reported earnings results and management’s positive outlook for the balance of the year, earnings guidance was raised. Management is now anticipating adjusted earnings per share will increase over 20 per cent year-over-year from its previous guidance of low-double digit growth.
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 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.
The company has been active in its share buyback program. On Oct. 19, management announced that a new share buyback program was recently accepted by the Toronto Stock Exchange. It will run from Oct. 24, 2018 through to Oct. 23, 2019. On May 14, the company completed its previous share buyback program that started on May 15, 2017. During this one year period, the company repurchased 4,384,062 shares at a weighted average price per share of $214.31. On the earnings call, the CEO remarked on the buyback program, indicating that management moved it forward from its original plans by several months stating, “Given the recent market volatility that we've all experienced, we saw very compelling opportunity to create additional value for our shareholders.”
Analysts’ recommendations
The stock is well covered by both Canadian and U.S. firms. In total, 27 analysts have provided research reports on this company after it reported its quarterly earnings results on Oct. 18, of which 24 analysts issued buy recommendations, two analysts issued hold recommendations, and one analyst (from ISS-EVA) issued a ‘sell’ recommendation.
Revised recommendations
In October, several analysts upgraded their recommendations and took their price targets higher. Of note, Steve Hansen, the analyst from Raymond James, increased his target price to $340 from $305. Kevin Chiang from CIBC Capital Markets lifted his target price to $310 from $300. Fadi Chamoun from BMO Capital Markets bumped his target price to $305 from $295. Cherilyn Radbourne from TD Securities upgraded her recommendation to a “buy” from a “hold,” and raised her target price to $325 from $290. Turan Quettawala from Scotia Capital lifted his target price to $315 from $295. Benoit Poirier from Desjardins Securities raised his target price to $311 from $274.
Financial forecasts
The Street is forecasting earnings per share of $14.08 in 2018, rising 16 per cent to $16.35 in 2019.
Financial expectations have been increasing. For instance, three months ago, the consensus earnings per share estimates were $13.36 for 2018 and $15.17 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 historical five-year average multiple.
Over the past three years, the stock has traded at a forward multiple of between approximately 12 times and roughly 18 times, suggesting there is room for multiple expansion.
Shares of CP Rail trade at a discount relative to its industry peer, Canadian National Railway Company (CNR-T), which is trading at a forward P/E multiple of 18.1 times.
The consensus one-year target price for shares of CP is $311.74, suggesting the stock price may increase 15 per cent over the next 12 months.
Insider transaction activity
Year-to-date, five insiders have traded shares in the public market and their trades are listed below.
Most recently, management executive Chad Rolstad made a small purchase on Oct. 31. He acquired 125 shares at a cost per share of U.S. $205.10 for a total purchase price of just over U.S.$25,000. This purchase increased his account balance to 235 shares.
On Aug. 30, Justin Meyer, Vice-President of Engineering, exercised his options and sold the corresponding number of shares (1,464) at a price per share of $267.10, eliminating his portfolio’s position.
On Aug. 27, Senior Vice-President and Chief Risk Officer Laird Pitz exercised his options and sold the corresponding number of shares (3,150), eliminating his account’s holdings.
Between June 6 and July 25, Chief Legal Officer and Corporate Secretary Jeffrey Ellis exercised his options and sold the corresponding number of shares (1,135), eliminating his account’s holdings.
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 delivered strong returns to investors with the share price closing at an all-time high on Oct. 9.
Year-to-date, the share price is up over 18 per cent, sharply outperforming the S&P/TSX composite index, which has a negative price return of nearly 6 per cent, and has also outperformed its peer, Canadian National Railway Company (CNR-T), which is up 8 per cent year-to-date.
In terms of key resistance and support levels, there is initial overhead resistance between $290 and $300, close to its record closing high of $288.70. Looking at the downside, there is strong support around $255, close to its 200-day moving average (at $246.62). The share price collapsed in Oct. but held at this key support level.
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