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In this March 21, 2014 picture, CSX hopper cars sit in a yard in Baltimore.

Patrick Semansky/The Associated Press

Sometimes you have to be a cryptographer to decipher messages emanating from takeover targets and suitors, but if we are reading it right, it appears CSX Corp. is sending a new signal to Canadian Pacific Railway Ltd.

CP and its largest shareholder, New York hedge fund Pershing Square Capital Management, met with CSX officials earlier this fall to propose a merger. According to people familiar with the overture, CSX officials were underwhelmed by CP's offer. Weeks later CSX officials cited potential regulatory opposition as a key obstacle to any potential merger.

Fredrik Eliasson, CSX's chief financial officer, offered a more nuanced explanation for the Florida-based railway's reluctance to hitch up with CP while speaking to a Credit Suisse Global Industrials Conference Wednesday morning.

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"We feel as [though] having gone through a very, very difficult time over the last two years with $800-million in coal[-related traffic] losses, we feel that we have an opportunity here to really get back in terms of producing double-digit earnings growth, getting valued in terms of where we are relative to our peers, at a different place. So, we're pretty excited about our standalone prospects," he said.

Translation: CSX's stock is undervalued and any potential buyer is going to be rebuffed unless they are willing to pay a huge premium.

Mr. Eliasson has a point about CSX's stock price. Although its stock is currently cresting $37 (U.S.) a share, close to its high last month of nearly $38 (likely spurred by the prospect of a CP bid), it is trading well below the relative values of its peers in the rail freight sector.

CSX's stock price trades at a multiple of 16 times its current earnings. According to Bloomberg, the multiple is well below the average rail freight P/E ratio of 20.42 and sharply lower than CP's P/E ratio of 25.

The high ratio gives CP a more lucrative takeover currency if it wanted to merge through a stock swap with the recovering CSX. That gap, Mr. Eliasson insists, is only temporary.

While CP may have the advantage with its more robust stock price, Mr. Eliasson reminded potential suitors that its Eastern-based rail network is an increasingly valuable asset at a time when railroads are clogged with booming oil shipments moving east from the Bakken region in North Dakota.

The bottleneck is particularly frustrating for CP, which moves much of its oil cars from the Western state through the clogged Chicago hub. CSX has a large network of eastern-based rail lines that could help CP break the gridlock.

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Reminding would-be buyers of CSX's eastern advantage, Mr. Eliasson told the conference: "It seems that East is a very logical place for the crude by rail [traffic] to continue to grow."

Investors will get to hear the other side of the story at 2:45pm eastern standard time, when CP's CEO Hunter Harrison takes questions at the Credit Suisse conference.

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