Canadian Pacific Railway (CP): Attractively Undervalued

By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter

From Cabot Wealth Advisory 5/25/10 Sign up for free Cabot Wealth Advisory e-newsletter

I am a value investor. I follow the teachings of Benjamin Graham, which are now utilized by many leading investors, including Warren Buffett. I look for quality companies at bargain prices. It doesn’t matter in what industry the company operates and where the company is headquartered. Lately, my attention has been drawn to a larger number of Canadian companies that are clearly undervalued and offer excellent appreciation potential during the next one to three years.

One of the most attractive Canadian companies is Canadian Pacific Railway.

Canadian Pacific Railway (CP),
founded in 1880 and based in Calgary, Alberta, operates over 15,000 miles of rail serving the Midwest and Northeast U.S., and more importantly, the major business centers of Canada. The railway offers coast-to-coast freight transportation for goods produced in Canada and the northern U.S. Canadian Pacific Railway’s low-cost freight transport is taking market share from trucking, which is burdened with rising fuel prices.

Intermodal container shipping offers an efficient means to transport goods over long distances. Goods typically arrive in the port of Vancouver on the west coast in containers and are hauled to their destinations efficiently by rail. Likewise, freight arrives in the port of Montreal near the east coast from Europe and is hauled to other areas in Canada and the U.S. Freight is frequently transferred to other railroads in Canada and the U.S. to reach destinations not served by Canadian Pacific Railway.

Revenues increased 3% during the past 12-month period ending 3/31/10. Earnings per share (EPS) fell 5% during the same period, but will likely increase 27% during the next 12 months. Revenues should rise 8% during the next 12 months led by intermodal container transportation.

Canadian Pacific Railway generates excellent cash flow and pays an attractive dividend yielding 1.6%. CP shares are undervalued at 16.4 times 12-month forward EPS of 3.64. In comparison, Warren Buffett paid 20 times EPS for Burlington Northern. I recommend buying CP at 60.00 or below.

Editor’s Note: You can read more about Canadian Pacific (CP) including buy and sell advice in Cabot Benjamin Graham Value Letter. You’ll also get 20 other excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy of the father of value investing, Benjamin Graham, to find the market’s best undervalued stocks. And he will tell you exactly when to sell, too. Don’t miss out on his next recommendations … click here now to get started today: Cabot Benjamin Graham Value Letter

Roy Ward J. Royden Ward

Editor of Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.