NEW YORK (TheStreet) -- Shares of Canadian Pacific Railway (CP - Get Report) are up by 5.7% to $146.67 in early afternoon trading on Wednesday, after the company detailed its $28.4 billion bid for rival Norfolk Southern (NSC) today.
Canadian Pacific is expecting to deliver a premium of close to 60% over Norfolk shareholder's holdings through its cash and stock offer.
The railroad operator also said that a combined company would generate savings of $1.8 billion annually.
Canadian Pacific released its detailed offer today after Norfolk rejected the bid saying that it presented too low of a premium.
Insight from TheStreet Research Team:
Should Norfolk Southern (NSC) just say no to Canadian Pacific's (CP) $95 offer announced yesterday, given that the stock was just at $72 not that long ago? Should it take the money and run? Or should it hold out for something higher, given that the stock traded at $117 at this point last year?
Right now it sure sounds like Norfolk Southern wants nothing to do with the offer, or wants something much higher if it is going to sell out to CP -- if it wants to sell at all.
I can't blame the company. Right now, the rails are caught in the grips of a huge decline in coal, the bedrock cargo for this business, and it's getting worse, not better, anytime soon, given the much lower cost of natural gas as a feedstock. Utilities that can switch from one fuel to another, however, have mostly done so. Coal, which represents almost 40% of the fuel for the U.S. electric grid, is not expected to go below 30% within the next 10 years even though natural gas is cheaper, abundant and cleaner.
So, it's pretty easy to see why Norfolk Southern is saying that coal's decline is bottoming out and its stock reflects too much negativity about that cargo and not enough of the positives that come from robust intermodal traffic.
- Jim Cramer, Maybe Norfolk Southern Should Just Say No to Canadian Pacific, originally published on 11/18/2015.
Separately, TheStreet Ratings team rates CANADIAN PACIFIC RAILWAY LTD as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
We rate CANADIAN PACIFIC RAILWAY LTD (CP) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations and expanding profit margins. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 9.4%. Since the same quarter one year prior, revenues slightly increased by 2.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Road & Rail industry and the overall market, CANADIAN PACIFIC RAILWAY LTD's return on equity significantly exceeds that of both the industry average and the S&P 500.
- Net operating cash flow has increased to $696.00 million or 30.33% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -5.55%.
- 48.80% 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 18.89% trails the industry average.
- CANADIAN PACIFIC RAILWAY LTD's earnings per share declined by 11.7% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, CANADIAN PACIFIC RAILWAY LTD increased its bottom line by earning $8.49 versus $4.98 in the prior year. This year, the market expects an improvement in earnings ($10.26 versus $8.49).
- You can view the full analysis from the report here: CP