In choosing a Stock of the Year, we aim for a “heads you win, tails you break even” situation. These stocks can put on above-average rises, but they’re unlikely to be disasters if they disappoint.
Our past #1 picks for The Successful Investor have sometimes taken a year or more to get going. Other times they take off right away. Our pick for 2012 took less than a year to start moving up substantially.
CANADIAN PACIFIC RAILWAY LTD. (Toronto symbol CP; www.cpr.ca) transports freight between Montreal and Vancouver and connects with hubs in the U.S. Midwest and Northeast. It gets 25% of its revenue from the U.S.
CP was our top pick for 2012 at $69. Since then, the stock has jumped 94.2%. The company continues to improve its efficiency, mainly with more efficient locomotives, better tracks, and software that optimizes train loads and speeds. In the quarter ended June 30, 2013, CP’s earnings soared 144.7%, to $252 million from $103 million a year earlier. Per-share earnings gained 138.3%, to $1.43 from $0.60, on more shares outstanding.
Revenue rose 9.6%, to $1.5 billion from $1.4 billion. The company saw gains from shipping consumer and industrial products (up 23.9%), grain (up 21.0%), forest products (up 10.4%) and fertilizer (up 8.7%). These increases offset declines in automotive products (down 8.6%) and coal (down 2.7%). Intermodal revenue was unchanged.
Canadian dividend stocks: Improved efficiency, lower costs help CP adapt to recent setbacks
CP’s operating ratio improved to 71.9% from 82.5% a year ago. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower the ratio, the better.) CP aims to cut its operating ratio to around 65% by the middle of 2016.
The company estimates that interruptions to its service, including flooding in Calgary and southern Alberta, cut its second-quarter revenue by $25 million. However, its improved efficiency helped it quickly get back to normal. CP’s lower costs will also help it adapt to new rail-safety regulations in the wake of the July 6 train crash in Lac-Megantic, Quebec.
For all of 2013, CP expects to spend $1.2 billion improving its tracks, trains and other equipment. The company’s long-term debt is $4.7 billion. It ended its latest quarter with cash of $442 million, or $2.53 a share. The $1.40 dividend yields 1.0%.
In the latest edition of The Successful Investor, we examine how CP’s restructuring and cost-cutting measures are likely to unfold over the next few years. We also look at its earnings prospects and whether the shares can keep on rising. We conclude with our clear buy-sell-hold advice on the stock.
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CP Rail’s efficiency and its prospects began to improve substantially after Hunter Harrison was installed as CEO (as we had expected). Can you think of any previous cases of stocks for which you believe the performance of the CEO was critical in moving the company ahead—or dragging it down?
Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' FREE Special Report from The Successful Investor.
Canadian Blue Chip Stocks:
Bank of Nova Scotia, CP Rail, CAE Inc. and more.
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