Should Your Money Be Working on the Canadian Pacific Railroad?

NEW YORK (TheStreet) -- TheStreet Ratings likes railroads. A half-dozen rail stocks are rated A- or higher.

TheStreet's top-rated name in the group, Union Pacific (UNP), is up 19% so far this year. Our other A+ name, Canadian Pacific (CP), is up about 20%.

But is the move in these stocks over, or is there more to come?

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Hints come from the American Association of Railroads' weekly traffic reports. The AAR reports numbers not just on U.S. railroads, but on those in Canada and Mexico as well.

Petroleum, metal and stone traffic rose 3.6% from a year ago at the end of June, the AAR, said, and total traffic is up 4.5% from this time in 2013. Much of the metal and stone being shipped is aimed at oil production.

Intermodal units, rail cars that become truck loads at their destination, are also up almost 6%, indicating a growing economy. This provides further lift to the rail sector.

According to the AAR, Canadian rail traffic is up only 2.4% against a year ago, while total traffic within the U.S. is up 4.5%. Mexico traffic is up only 2.2% so far this year, against a year ago.

It is the U.S. rail market that is powering ahead most rapidly. 

We've seen oil tied to rail traffic before, a long time ago. Back in the 1870s, before the Tidewater pipeline was able to move product from the west Pennsylvania oil fields to coastal refineries, rail was the main way oil went to market. 

Many new fields today are far beyond the reach of current pipelines, which can cost many years to approve and build. So rail is being relied upon again. 

Much of Union Pacific's value to the play lies in north-south routes that can take crude to Gulf Coast refineries, and oilfield equipment, north. But some of those operations are vulnerable to pipeline competition -- the Seaway pipeline from Oklahoma to Houston was reversed in 2012 and its capacity is now being doubled by construction of a twin line. This will provide competition to Union Pacific in that part of its network. 

Burlington Northern, which was purchased by Berkshire Hathaway (BRK.A) in February 2010, is in a better position to take advantage of the new oil plays based on its route structure. The Rational Walk says the line has become increasingly profitable under Berkshire's ownership. But you don't buy a conglomerate like Berkshire Hathaway just for its railroad. Berkshire is not a pure play on railroad growth.

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It's Canadian Pacific that may be better positioned than Union Pacific in the near term to make further gains. It has extensive routes in North Dakota and owns lines that cross the border there and in Minnesota, a spokesman confirmed. This also makes it a good choice for taking Alberta oil to the U.S. market in the absence of the Keystone pipeline. Delayed pipeline competition means more high-profit oil runs.

Canadian Pacific had a poor fourth quarter of 2013, but profits rebounded in the first quarter of 2014. It seems well-leveraged to growth in the oil markets, and analysts expect profits to explode for the rest of this year, to $2.12 a share in the second quarter and $2.44 a share in the fourth, compared with $1.44 a share reported in March.

In the case of Canadian Pacific vs. Union Pacific, it looks likely to have less pipeline competition going forward. Pipelines cost less than railroads, and further delays on Keystone mean big profits for CP, while the expansion of Seaway at the southern end of the plains means less profit going forward for UP.

Canadian Pacific is due to report on its second quarter July 17, and speculators who buy the earnings growth story might want to get in ahead of that.

At the time of publication the author owned no shares in companies mentioned here.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


 

Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates CANADIAN PACIFIC RAILWAY LTD as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate CANADIAN PACIFIC RAILWAY LTD (CP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and good cash flow from operations. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CANADIAN PACIFIC RAILWAY LTD has improved earnings per share by 16.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. During the past fiscal year, CANADIAN PACIFIC RAILWAY LTD increased its bottom line by earning $4.98 versus $2.80 in the prior year.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 9.1%. Since the same quarter one year prior, revenues slightly increased by 0.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.67, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.14, which illustrates the ability to avoid short-term cash problems.
  • 37.38% is the gross profit margin for CANADIAN PACIFIC RAILWAY LTD which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 16.83% trails the industry average.
  • Net operating cash flow has slightly increased to $287.00 million or 7.49% when compared to the same quarter last year. Despite an increase in cash flow, CANADIAN PACIFIC RAILWAY LTD's cash flow growth rate is still lower than the industry average growth rate of 20.25%.

TheStreet Ratings team rates UNION PACIFIC CORP as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate UNION PACIFIC CORP (UNP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, revenue growth, notable return on equity and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 28.95% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, UNP should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • UNION PACIFIC CORP has improved earnings per share by 17.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, UNION PACIFIC CORP increased its bottom line by earning $4.72 versus $4.14 in the prior year. This year, the market expects an improvement in earnings ($5.50 versus $4.72).
  • Despite its growing revenue, the company underperformed as compared with the industry average of 9.1%. Since the same quarter one year prior, revenues slightly increased by 6.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Road & Rail industry and the overall market, UNION PACIFIC CORP's return on equity exceeds that of both the industry average and the S&P 500.
  • 41.11% is the gross profit margin for UNION PACIFIC CORP which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 19.29% is above that of the industry average.

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