The Disconnect Between Canadian Pacific And The Street's Valuation; Loop Upgrades To Buy

“Rather than try to guess what President-elect Trump will actually accomplish we will instead steer investors to Canadian Pacific Railway Limited (USA) CP based on the usual high quality, good management, strong FCF arguments,” Loop Capital’s Rick Paterson said in a note.

Paterson upgraded the rating on the company from Hold to Buy, while raising the price target from C$206 to C$221.

Valuation Disconnect

The analyst mentioned that while Canadian Pacific Railway had the higher valuation in the railroad industry as recently as December 2015, the stock currently trades at a meaningful discount to peers. There appears to be a disconnect in the valuations.

“Our interpretation is that railroad valuations have rapidly realigned on the back of the presidential election based on hopes and fears of what's to come,” Paterson stated.

What To Expect

There have been concerns that Trump would opt out of NAFTA, which would impact Canadian Pacific, although the same concerns have led to record valuation increases for U.S. large caps.

The analyst believes that there could be two possibilities. First, Canadian Pacific shares could move closer in valuation to Canadian National Railway (USA) CNI. Second, valuations in the sector decline but Canadian Pacific declines much less.

“Either way we like it,” Paterson said.