(Scott Deveau of the National Post)
While the recession has certainly beaten up the volumes of Canadian Pacific Railway Ltd., it has also provided a much needed opportunity to strip some costs out of its operations as well.
As its volumes start to recover in the coming years, there is a potential that Canada’s No. 2 railway could to see some significant earnings growth through 2011, according to Walter Spracklin, RBC Capital Markets analyst, who has become considerably more bullish on the stock after a recent investors trip.
“While it is true that the current recession has had a strong negative impact on virtually all of the North American railroads’ business segments, it is our view that CP has had a more pronounced negative shift in certain of what we would call CP’s “core” segments,” he said in a note to clients Wednesday. “We believe that a return to a more “normalized” level – particularly for Potash and MetCoal – will lead to significant operating leverage and a meaningful boost to earnings.”
The lynchpin of that growth will come from a recent cost-cutting drive at the railway that should improve its efficiency on an ongoing basis, Mr. Spracklin said.
While Mr. Spracklin anticipates earnings of $2.86 a share for CP this year, he estimates it will grow to $3.77 a share in 2010 before jumping estimated $4.75 a share in 2011.
He raised his rating on the stock to an “outperform” and raised his price target to $67 a share, from $49 previously.