(The following report by Scott Deveau appeared on the National Post website on August 22.)
OTTAWA — While shares in Canadian Pacific Railway Ltd. (CP/TSX) have tumbled 20% in the past month in the aftermath of a rebuffed takeover bid, its fundamentals remain strong, according UBS analyst Fadi Chamoun, who upgraded the stock to a “buy.”
Mr. Chamoun noted that the current credit crisis has negatively impacted CP shares in two ways – by deflating the takeout premium embedded in its valuation and by heightening the earnings risk associated with a potential downturn in North America’s GDP growth.
Nevertheless, ongoing gains in efficiency, robust volume growth in bulk segments, and a large share buyback program should minimize the impact of the crisis on the earnings of Canada’s second largest railway.
“CP Rail’s strong ties to the robust growth of the global economy (40% of volumes tied to global trade) and the fast growing Western Canadian industrial base combined with its ability to grow at low incremental costs make for a compelling investment case,” Mr. Chamoun said in a note to clients.
He also readjusted his target price from $93 to $85 – essentially where it was before the railway became the subject of speculation regarding a takeover bid by private-equity player Brookfield Asset Management Inc.