Canada’s No. 2 Railroad Company is My No. 1 ‘Buy’
Railroad companies continue to power ahead. Since early 2009, shares of the largest railroad company in the United States, Union Pacific (NYSE: UNP), have increased more than 625%.
Shares of Canada’s biggest railway, Canadian National (NYSE: CNI) have gone up about 445% in the same period.
But more impressive is the performance of Canada’s second biggest rail transport company,Canadian Pacific Railway (NYSE: CP). Since shares bottomed near $ 25 in February 2009, they are up more than 700% to an all-time high above $ 210.
With no historical resistance in play and strong projected revenue and earnings growth, CP should continue chugging higher.
Headquartered in Calgary, Alberta, Canadian Pacific operates an expansive network spanning 14,400 miles across Canada and the United States. The vast majority of its revenue is derived from freight, hauling commodities such as grain and coal, automotive parts and chemicals, just to name a few. It also provides logistics and supply chain solutions.
Transporting crude oil has become a major contributor to expanding rail profits because pipelines are not located near major shale oil plays.
Five years ago, this aspect of Canadian Pacific’s business was virtually non-existent. By 2012, the company moved 53,500 carloads of crude by train. This amount jumped 68% to 90,000 carloads in 2013. The rapid growth in this business segment is expected to continue, with CEO Hunter Harrison projecting crude oil shipments will double to roughly 10% of the company’s total revenue by 2016.
Crude shipments contributed to the company’s record second quarter. In July, CP reported quarterly revenue increased 12% year over year to $ 1.7 billion. Earnings jumped 48% to $ 2.11 per share (Canadian) from $ 1.43 in the year-ago quarter.
Harrison said the company’s future is “very promising,” and I find it hard to disagree with him.
Increasing demand for crude, grain, metals, minerals and consumer products should result in higher freight volumes, bringing more top and bottom line growth.
Shareholders certainly appear optimistic.
Although the chart does not extend back this far, CP has been on a major uptrend since March 2009, when it bottomed just above $ 25. By January 2011, shares rose 175% to a high above $ 69 before pulling back to a low just under $ 45 by September of that year.
From there, the stock started a rapid climb, more than tripling by May 2013 to a peak just under $ 140. It then moved sideways for several months before making new highs near $ 155 in December 2013.
Again there was a prolonged period of consolidation, but in May, CP broke through the $ 160 level and formed an accelerated uptrend line.
This summer, the stock stalled at the psychologically important round number of $ 200. Shares traded just below this level for several weeks, gathering the strength to break what had become a minor shelf of resistance.
CP is now trading just below its all-time high of $ 210.71. With no historical resistance in sight, the stock should continue its ascent. Analysts following the company project shares could go as high as $ 240. At current levels, this target presents traders with 16% potential returns.
The bullish technicals are supported by strong fundamentals. For the upcoming third quarter, analysts project revenue will increase 12% year over year to $ 1.7 billion. For the full 2014 year, analysts estimate sales will be 9% higher at $ 6.7 billion.
Third-quarter earnings are expected to rocket 32% higher to $ 2.48 per share from $ 1.88 in the year-earlier quarter. For the full year, analysts expect a 33% increase to $ 8.57 per share from $ 6.42 last year.
Risks to consider: If the Keystone XL Pipeline is approved, it would be a boon for Canada but could affect some of CP’s oil shipments since the pipeline would transport up to 830,000 barrels of crude oil per day from Alberta to Houston, Texas. However, it would take several years for the pipeline to be built. Additionally, CP’s other business segments should remain strong, and many western Canadian and U.S. shale fields would still not be served by pipelines.
Recommended Trade Setup:
— Buy CP at the market price
— Set stop-loss at $ 198.99
— Set price target at $ 239.99 for a potential 16% gain by mid-2015
Note: In just six months, the Alpha Score has tagged 71 stocks right before they jumped 10% in two weeks. And it’s tagged 21 stocks right before they jumped 20%. To see how it does it — and to get the name of a stock flashing “buy” right now — click here.