Canadian Pacific Railway Limited (CP) has sold 12.2% stake to William A. Ackman, the founder and CEO of hedge fund Pershing Square Capital Management, L.P. The company sold approximately 20.6 million shares to Ackman but the terms of the agreement remain undisclosed.
The deal remains accretive to Canadian Pacific and is expected to enhance market value of its shares given the investment and strategic changes brought in by Ackman. It signifies the rapidly emerging market for rail freight transportation that has attracted eminent investors like Ackman to buy stake.
According to Ackman, Canadian Pacific remains a golden bet as it is currently undervalued and is therefore attractive for long-term investment. Over the last one year, Canadian Pacific has not registered any remarkable growth in its share price. However, we believe the current market forces acting as long-term catalyst to the railroad industry are the downtrend in the truck market, price recoveries and fuel surcharges as well as increased exports.
Further, Canadian Pacific’s improving freight segments, particularly Automotive, Coal and Intermodal along with business wins, like the 10-year contract with Teck Resources Limited for coal transport, reflect strong upward potential for the company. Additionally, capital programs including the planned investment of C$950 million to C$1,050 million for full-year 2011 for infrastructural development investment will lead to increased profitability for the company.
While the company is hopeful of turning around with this stake sale, a success story is yet to be seen. There are several impediments like rising fuel prices, lackluster earnings, competitive threats from railroads like Canadian National Railway (CNI), a strong Canadian dollar, highly unionized workforce, regulatory pressures, increasing headcount and negative impacts on the automotive business due to the Japan disaster. These cloud over the company’s present operations and call for a negative outlook on the stock.
We maintain our long-term Underperform recommendation on Canadian Pacific. However, the stock holds a short-term (1–3 months) Zacks #3 Rank (Hold).
CDN NATL RY CO (CNI): Free Stock Analysis Report
CDN PAC RLWY (CP): Free Stock Analysis Report
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