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Canadian Pacific (CP) at 52-Week High, Can It Soar Higher?

Zacks Equity Research

Canadian Pacific Railway Limited CP hits a 52-week high of $228.79 during the trading session on May 16, before retracing a bit to close at $228.63. In fact, this Calgary, Canada-based railroad operator has also performed well in the past three months. The stock has gained 11.8% compared with its industry’s 5.7% growth.

Three-Month Price Performance

While factors like upbeat intermodal volumes, increase in grain carloads and the recent hike raise optimism, we believe that there are enough reasons to prevent the stock from surging higher.

Canadian Pacific’s Zacks Rank #3 (Hold) also suggests that any upside from here may be limited.

Catalysts Behind the Healthy Run on the Bourse

Shareholder-Friendly Attitude: We are impressed with this railroad operator’s efforts to reward its shareholders through share repurchases and dividends. In line with its pro-investor approach, in May 2019, the company increased its quarterly dividend by 27.5% to C$0.83 per share (C$3.32 annually).

The company has a steady track record of increasing dividends. Evidently, the latest hike marks the fourth straight year of dividend increase and reflects a 137% rise since 2014. Canadian Pacific has paid dividends worth C$1.47 billion and returned C$9.2 billion to its shareholders since 2014.

Volume Growth: Volume growth is aiding Canadian Pacific immensely owing to impressive performances at sub-groups like intermodal, grain and potash. In 2018, overall carloads had improved 4%. Even though the metric declined in the first quarter, we believe it was mainly due to harsh weather conditions and network issues.

In fact, in April, Canadian Pacific moved 2.64 million metric tonnes of Canadian grain and grain products, which is a record for the company. This robust performance signals at a network recovery.

Revenue Beat in Q1: In first-quarter 2019, the company posted revenues of $1,329 million (C$1.77 billion), beating the Zacks Consensus Estimate of $1,321.7 million. Also, the top line improved year over year. Strong freight revenues aided top-line growth. Freight revenues rose 6% year over year and contributed 97.7% to the top line.

Positive Estimate Revisions: Annual estimates for Canadian Pacific have moved north in the past 30 days. In this period, the Zacks Consensus Estimate for 2019 earnings has increased 0.3%. For 2020 earnings, the consensus mark moved 0.4% up in the same time frame.

Despite these key driving factors, we advise investors to wait for a better entry point before buying shares in the oil major. Here’s why

The Headwinds

High Costs: High operating expenses remain a major concern at Canadian Pacific. Operating expenses have increased 11% in 2018.  Continuing the trend, the metric increased 9% in first-quarter 2019. Operating ratio (operating expenses as a percentage of revenues) deteriorated in the first quarter mainly owing to high costs. Additionally, with Canadian Pacific investing significantly to upgrade its facilities, the company is incurring significant amount of capital expenses. Capital expenditures are projected around C$1.6 billion in 2019, which in turn, is hurting the bottom line.

Weak US Grain Portfolio: The below-par performance of the company’s US grain portfolio is concerning. In the fourth quarter of 2018, volumes for the portfolio decreased 18%. The dismal performance was due to reduced shipments to the US P&W. Weakness continued in the first quarter as well contributing to the decline in overall grain volumes.

Highly Leveraged: The ratio of Canadian Pacific’s long-term debt-to-capitalization (expressed as a percentage) currently reads 55.3. This compares unfavorably to the figure of 46.7 for its industry. Long-term debt at the end of 2018 amounted to C$8,190 million, which increased further to C$8,427 million at the first-quarter end.

Stocks to Consider

While Canadian Pacific is expected to perform in line with the broader U.S. equity market over the next one to three months, investors interested in the Transportation sector may consider SkyWest SKYW, Hertz Global Holdings HTZ and Hub Group HUBG. While SkyWest sports a Zacks Rank #1 (Strong Buy), Hertz Global and Hub Group carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of SkyWest , Hertz Global Holdings and Hub Group have rallied more than 34%, 25% and 14%, respectively, on a year-to-date basis.

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