Canadian Pacific Railway Ltd. $44 - Toronto symbol CP

CANADIAN PACIFIC RAILWAY LTD. $44 (Toronto symbol CP; Shares outstanding: 153.8 million; Market cap: $6.8 billion; SI Rating: Average) transports freight over a rail network between Montreal and Vancouver. In the United States, subsidiaries connect CP Rail’s Canadian lines to major hubs in the Midwest and Northeast. Alliances with other railways extend its reach to Mexico. In the three months ended September 30, 2008, CP Rail’s earnings per share excluding one-time items fell 2.4%, to $1.20 from $1.23. Like most railways, CP Rail uses surcharges to offset higher fuel costs. This pushed up revenue by 6.5%, to $1.3 billion from $1.2 billion. CP Rail’s fuel costs rose 49% in the third quarter. Consequently, its operating ratio (regular operating costs divided by revenue — the lower, the better) weakened to 76.0% from 72.9% a year earlier. However, falling oil prices and a new productivity improvement plan should help CP Rail cut its costs. The rising U.S. dollar is a plus for the company, as it pushes up the contribution of its U.S. operations. CP Rail will likely report earnings of around $4.16 a share in 2008. Earnings could rise to $4.55 in 2009. The stock now trades at a reasonable 9.7 times that 2009 estimate. The company’s annual dividend rate of $0.99 yields 2.3%. Canadian Pacific Railway is still a safety-conscious buy.

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