CANADIAN PACIFIC RAILWAY LTD. (Toronto symbol CP; www.cpr.ca) fell almost 7% this week after activist investor Pershing Square Capital Management L.P. announced that it will sell 7 million of its CP shares over the next year. Pershing currently holds 24 million CP shares, or 14.2% of the total outstanding.
In June 2012, Pershing helped install Hunter Harrison as CP’s chief executive officer. Mr. Harrison is the former CEO of Canadian National Railway Co. (Toronto symbol CNR).
Under his leadership, CP has aggressively increased its efficiency with new locomotives, upgraded tracks and software that optimizes train loads and speeds.
CP’s shares have gained 76% in the past year. As a result, it now accounts for a high 26% of Pershing’s assets. Following the sale, Pershing will still be the company’s largest shareholder, with a 10% stake.
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CP continues to benefit from its restructuring plan. In the first three months of 2013, CP’s earnings jumped 52.8%, to $217 million, or $1.24 a share. A year earlier, the company earned $142 million, or $0.82 a share.
The higher earnings are mainly due to CP’s improving efficiency. Its operating ratio improved to 75.8% from 80.1% a year ago. The company aims to cut its operating ratio to 65% by the middle of 2016.
Revenue rose 8.6%, to $1.5 billion. CP saw revenue gains from shipping consumer and industrial products (up 24.8%), fertilizers (up 20.6%), grain (up 9.0%), coal (up 8.8%) and forest products (up 6.0%). That offset declines in automotive products (down 7.6%) and intermodal (down 4.2%).
CP trades at 20.5 times its likely 2013 earnings of $6.18 a share. The $1.40 dividend yields 1.1%.
In tomorrow’s Email/Telephone Hotline to subscribers of The Successful Investor, we look at whether the pressure put on CP’s stock by Pershing’s sale of shares will be offset by long-term earnings growth spurred by the company’s improving efficiency. We conclude with our clear buy-sell-hold advice on the stock.
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
If a stock that has been successful for you suddenly declines due to a piece of negative news, what is your approach? Do you consider buying more shares at the lower price? What would it take to make you sell the stock? Let us know what you think.
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