(The following story by Jonathan Ratner appeared on the National Post website on July 26.)
OTTAWA — News of Brookfield Asset Management Inc.’s (BAMa/TSX) takeover approach to Canadian Pacific Railway Ltd. (CP/TSX) earlier in the year helped drive a run-up in the railway’s shares towards the $90 mark last week.
But unexciting earnings and word from the company that it doesn’t think splitting itself into two units – a rail company and a track and real estate asset company – is a good idea, have sent the stock back near its pre-takeover buzz level.
Rival Canadian National Railway Co. (CNR/TSX) also said it doesn’t want to pursue such a reorganization.
Blackmont Capital analyst Avi Dalfen points out that private equity has bought U.S. Class 2 rails in the past year for 11 times EV/EBITDA (Enterprise value/Earnings before interest, taxes, depreciation and amortization).
However, he uses the industry average price-to-earnings ratio of 17.1 times, the industry EV/EBITDA of 8.5 times, and a share buyback calculation that shows CP can repurchase its shares for up to $105 each without diluting earnings.
This produces a new price target of $85 per share, up from $76. Mr. Dalfen rates CP a “hold.”