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efta-01371111DOJ Data Set 10OtherEFTA01371111
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DOJ Data Set 10
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efta-01371111
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31 October 2017
Railroads
Canadian Rails
Rating
Buy
North America
Canada
Company
Canadian Pacific
industrials
Railroads
CPN
CPUS
Shifting Gears, Initiate Buy/$209 price
target
Following its multi-year implementation of Precision Railroading, CP is shifting
gears from cost take-out to top-line growth. As such, we see at least 15%
upside in shares as CP leverages its reduced cost base, improved service levels,
and recent capacity investments to retake market share. We expect this to
translate to 30% cumulative EPS growth over the next two years, reflecting mid-
single digit revenue growth, significant operating leverage, and accelerated share
repurchase. Against this backdrop we see CP's relative valuation discount as
unsustainable, which underpins our positive stance to shares. Initiate Buy.
CP is putting the pieces together to leverage a better network
After bringing its cost base closer in-line with CNI, CP has undertaken a number
of initiatives aimed at growing its top-line and taking market share. Further, it has
made a number of capacity investments in order to improve service levels and
more profitably handle volume growth across its network and reinvigorated its
sales/marketing efforts to expand existing relationships and win new business. At
the end of the day, we believe CP is poised to drive best in class volume growth
and increase operating leverage as it targets higher margin business. To this point,
we forecast volume growth (measured by revenue ton-miles [RTM's]) to increase
at a 3.1% CAGR over the next two years compared to 2.4% CAGR at CM. In
addition to CP's company-specific initiatives, we see outsized tailwinds for CP's
domestic intermodal, crude by rail, and potash businesses which support our view
of best-in-class volume growth.
CP's discounted valuation does not reflect earnings potential
CP currently trades at 17.5x NTM EPS estimates, which is about 3% below its 5-
year avg. and nearly 10% below CNI's current multiple. CP's de-rating (both on
an absolute and relative basis) has coincided with a 20% decline in merchandise
volumes from 2014 to 2017E while CNI's merchandise ATM's are now back in-
line with 2014 levels. Given our expectation for CP to generate best-in-class RTM
growth over the next several years, we see potential for shares to re-rate higher
as improved operating leverage translates to higher earnings growth.
Valuation and risks
Our $209 price target is based on 17.5x our 2019 EPS estimate, which is
supported by our DCF framework (3.75% terminal growth and 7.9% WACC).
Downside risks include a sharp decline in commodity prices, lower pricing,
NAFTA, and recession.
Page 38
Seldon Clarke
Associate Analyst
• 1-212-250-5969
seldon .clarke(Adb.can
NIG," at 30 Oct 2017 IUSDI
Price Target
52-week range
Puctfprice NAetivu
174.74
209.00
177.61 - 139.33
Aairi
viv^1.-ytiwee
Performance
I%)
Absolute
TSE
Composite
Sour.* dunes Bart
lm
3m
12m
4.0
10.7
22.2
2A
5.8
8.2
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Market Cap IUSDI
25.418.3
Shares outstanding In))
145.5
Free float f%l
100
Volume (30 Oct 2017)
73.246
Option volume (txi. snrs., IM avg.)
42.935
Sane DetetteM ere
Deutsche Sank Securities Inc.
CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e)
DB-SDNY-0064308
CONFIDENTIAL
SDNY_GM_00210492
EFTA01371111
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