RBC: Buy The Dip On Canadian Pacific Even If It Doesn't Buy Norfolk Southern

• Canadian Pacific Railway Limited (USA) CP shares have plunged 30 percent over the last three months.
• RBC Capital Markets’ Walter Spracklin upgraded the rating for the company from Sector Perform to Outperform, while reducing the price target from C$189 to C$179.
• Canadian Pacific’s current stock valuation reflects the risk associated with the company, Spracklin mentioned.

Canadian Pacific is among the most efficient, well-positioned companies in the rail space, analyst Walter Spracklin said. The company reported its 4Q EPS at $2.72, in-line with expectations. Although the company’s revenues declined y/y, the impact on the bottom-line was offset by lower material costs and tailwinds from lower fuel expenses.

Terming the recent decline in the company’s shares as overdone, Spracklin mentioned that the pressure resulted from the deterioration in overall demand, driven by commodity price weakness.

A potential strategy shift may result in Canadian Pacific abandoning its efforts to acquire Norfolk Southern Corp NSC, Spracklin commented, adding that this is likely to be followed by the company reconsidering its share repurchase plan, which is currently on hold.

“With pricing holding steady, cutting costs and buying back material amounts of stock, we believe that a refocus on this strategy could result in meaningful upside as fundamental investors re-enter the stock,” the RBC Capital Markets report stated.

The company’s new guidance of $1.1 billion capex or less than 16 percent of revenue for 2016 demonstrates management’s focus on capital efficacy, Spracklin added.