Canadian Pacific: 2011 Capital Plan - Analyst Blog

Canadian Pacific Railway Limited (CP), Canada's second biggest railway, plans to invest C$950 million to C$1.05 billion in capital projects this year. The capital plan represents an increase of approximately 30% from the C$750 million to C$800 million budgeted for 2010.

Canadian Pacific will spend C$680 million for the renewal of track infrastructure across Canada and in the Upper Midwest and Northeastern United States. The company will also invest C$200 million in boosting rail volumes, productivity initiatives, and network enhancements in an effort to tap the expected strong demand in many of its commodity-based businesses.

Further, C$80 million capital will be spent for upgrading computer systems and information technology, and C$40 million will be used for addressing capital regulation, particularly positive train control.

On a comparative basis, 2010 capital budget included approximately C$646 million for the renewal of rail, ballast, crossties, automated signal systems, buildings and equipment and C$124 million for information technology, positive train control, efficiency and other opportunity capital projects.

We believe that increased investments will lead to higher profitability and improve the company's route structure and network. Despite the slow economic recovery, management appears confident about delivering strong results with a low operating ratio over the next few years.

Canadian Pacific remains on track to produce an operating ratio in the low 70s over the next three-to-five years. This low operating ratio can be achieved through structural cost reductions, running longer and heavier trains equipped with distributed power, greater asset utilization as well as consolidating divisions, yards and shops.

Canadian Pacific's biggest customer, Teck Resources Limited (TCK), could present an immediate growth opportunity by strengthening Canadian Pacific's coal production in several key markets. This would solidify Canadian Pacific's presence in export trade and lead to a rise in coal volumes in 2011.

In addition, the company's strong balance sheet provides flexibility and generates strong returns to shareholders in the form of dividend. However, we remain on the sidelines due to fragile intermodal growth, weak forest product demand, lower automotive volumes, strong Canadian dollar, increased regulation, competitive threats and the company's highly unionized labor.

We are currently maintaining our long-term Neutral recommendation supported by the Zacks # 3 Rank.

 
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