CP

One key part of our three-part investment strategy is to downplay stocks that are in the broker-media limelight. The problem with the limelight is that raises investor expectations. When stocks fail to live up to those heightened expectations, as some inevitably do, downturns can be sudden, brutal and, sometimes, permanent. However, some stocks deserve a longer stretch in the limelight than others. CP is one of them. Canadian Pacific Railway, $99.64, symbol CP on Toronto (Shares outstanding: 173.1 million; Market cap: $17.2 billion; www.cpr.ca), transports freight between Montreal and Vancouver and connects with hubs in the U.S. midwest and northeast....

CANADIAN PACIFIC RAILWAY LTD. $97.70, Toronto symbol CP, rose 5% this week after the company announced a major restructuring plan aimed at improving its efficiency. CP’s strategy includes cutting 25% of its workforce, making its trains longer and faster, and closing some terminals. CP didn’t say how much these moves would cost. However, the restructuring should help cut its operating ratio from 74.1% to around 65% in 2016. (Operating ratio is calculated by dividing a company’s regular operating costs by its revenue. The lower the ratio, the better.) In addition, CP has suspended its plan to build new rail lines that would have served coal mines in the Powder River Basin in Montana and Wyoming. The company received an exclusive option to build these lines as part of a 2007 acquisition. However, power plants are switching to natural gas, which has hurt demand for coal. As a result, CP will write down this option and related assets by $180 million. That’s equal to 80% of the $224 million, or $1.30 a share, that it earned in the third quarter of 2012....

CANADIAN PACIFIC RAILWAY LTD. $97 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 173.0 million; Market cap: $16.8 billion; Price-to-sales ratio: 3.0; Dividend yield: 1.4%; TSINetwork Rating: Above Average; www.cpr.ca) plans to cut 25% of its workforce as part of a major restructuring plan aimed at improving its efficiency. CP is also increasing the length and speed of its trains. The plan should cut CP’s operating ratio from 74.1% in the third quarter of 2012 to 65% in 2016. (Operating ratio is calculated by dividing regular operating costs by revenue—the lower, the better.) In addition, CP has suspended its plan to build new rail lines that would have served coal mines in Montana and Wyoming. That’s because power plants are switching to cheaper natural gas, which has hurt demand for coal. As a result, CP will take a $180-million charge. That’s equal to 80% of the $224 million, or $1.30 a share, that it earned in the third quarter. CP Rail was our #1 buy for 2012. It’s still a buy....

CANADIAN PACIFIC RAILWAY $91.88 (Toronto symbol CP; Shares outstanding: 171.7 million; Market cap: $15.8 billion; TSINetwork Rating: Average; Dividend yield: 1.5%; www.cpr.ca), transports freight between Montreal and Vancouver and connects with hubs in the U.S. midwest and northeast.

In the quarter ended September 30, 2012, CP’s revenue rose 8.2%, to $1.45 billion from $1.34 billion a year earlier. Earnings rose 19.8%, to $224 million, or $1.30 a share, from $187 million, or $1.10.

CP’s operating ratio improved to 74.1% from 75.8%, a year ago. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower the ratio, the better.) The improvement came from higher shipments, lower fuel prices and better operating performance.

...

The Howard Hughes Corp., $73.50, symbol HHC on New York (Shares outstanding: 37.9 million; Market cap: $2.8 billion; www.howardhughes.com), owns 34 commercial, residential and mixed-use properties in 18 U.S. states. General Growth Properties (symbol GGP on New York), a real estate investment trust (REIT) that went bankrupt during the financial crisis, handed out shares of Howard Hughes as part of its restructuring in 2010. The assets held by Howard Hughes required development and considerable funding. That made them a poor fit with a U.S. REIT, which must pay out 90% of its operating profit as a dividend. Prominent U.S. investor Bill Ackman is the chairman of Howard Hughes. He also owns about 10% of the company through his Pershing Square Capital Management firm. (Incidentally, Pershing Square also owns 14.2% of CP Rail and recently succeeded in replacing seven of CP’s 16 directors with its own nominees. It also appointed Hunter Harrison, the successful former CEO of CN Rail, as CP’s chief executive)....

CP is up almost 24% since we recommended it in March 2012. That was just after we made CP our “Stock of the Year” for 2012 in The Successful Investor, our conservative growth advisory. Since then, prominent U.S. hedge fund Pershing Square Capital Management has successfully installed Hunter Harrison, Canadian National Railway’s former chief executive, as CP’s CEO. That move is already paying off—and we think there are more gains ahead. CANADIAN PACIFIC RAILWAY $91.88 (Toronto symbol CP; Shares outstanding: 171.7 million; Market cap: $15.8 billion; TSINetwork Rating: Average; Dividend yield: 1.5%; www.cpr.ca), transports freight between Montreal and Vancouver and connects with hubs in the U.S. midwest and northeast. In the quarter ended September 30, 2012, CP’s revenue rose 8.2%, to $1.45 billion from $1.34 billion a year earlier. Earnings rose 19.8%, to $224 million, or $1.30 a share, from $187 million, or $1.10....

CANADIAN PACIFIC RAILWAY LTD. $86 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 171.3 million; Market cap: $14.7 billion; Price-to-sales ratio: 2.7; Dividend yield: 1.6%; TSINetwork Rating: Above Average; www.cpr.ca) earned $103 million, or $0.60 a share, in the three months ended June 30, 2012. That’s down 19.5% from $128 million, or $0.75 a share, a year earlier.

A nine-day strike by CP’s locomotive engineers, conductors and yard workers cut its earnings by around $0.30 a share in the latest quarter. In addition, CP paid severance costs to its previous chief executive and other expenses related to the hiring of its new CEO. Without these items, CP would have earned $1.20 a share.

CP is benefiting from a plan to improve its efficiency with new locomotives, upgraded tracks, and software that optimizes train loads and speeds. This was the main reason for the higher earnings.

...

CANADIAN PACIFIC RAILWAY LTD., $91.80, Toronto symbol CP, rose 4% this week after it reported better-than-expected quarterly earnings. That’s because the company is starting to benefit from a major plan to improve its efficiency with new locomotives, upgraded tracks and software that optimizes train loads and speeds. In the three months ended September 30, 2012, CP’s earnings rose 19.8%, to $224 million, or $1.30 a share. That easily beat the consensus estimate of $1.23. A year earlier, the company earned $187 million, or $1.10 a share. Revenue rose 8.2%, to $1.45 billion from $1.34 billion. The company saw revenue gains from shipping automotive products (up 31.3%), consumer and industrial products (up 23.7%), coal (up 9.5%), intermodal (up 7.4%) and grain (up 2.1%). Revenue from fertilizer shipments fell 19.0%, while forest products revenue declined 3.9%....

Canadian Pacific Railway has gained 22% since the start of 2012, while Canadian National Railway is up 9%. Even so, both trade at reasonable multiples to their earnings. Due to their importance to the Canadian economy, all investors should own at least one railway. We prefer CP for new buying. CANADIAN NATIONAL RAILWAY CO. $87 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 434.8 million; Market cap: $37.8 billion; Price-to-sales ratio: 3.8; Dividend yield: 1.7%; TSINetwork Rating: Above Average; www.cn.ca) reported that its earnings rose 17.3% in the three months ended June 30, 2012, to $631 million from $538 million a year earlier. Earnings per share rose 22.0%, to $1.44 from $1.18, on fewer shares outstanding. If you exclude one-time items, such as gains on sales of rail lines, earnings per share rose 19.0%, to $1.50 from $1.26. Revenue rose 12.5% to $2.5 billion from $2.3 billion. CN saw higher shipments of metals and minerals, coal, intermodal (containers that can be shipped by rail, ship or truck), petroleum and chemicals, and automotive and forest products. That offset lower shipments of grain and fertilizer....

CANADIAN PACIFIC RAILWAY $85.01 (Toronto symbol CP; Shares outstanding: 171.7 million; Market cap: $14.6 billion; TSINetwork Rating: Average; Dividend yield: 1.7%; www.cpr.ca) continues to make progress with its plan to improve its efficiency with new trains and streamlined schedules. The company has just launched its new transcontinental service for intermodal containers (which can be shipped by rail, ship or truck), which uses a more direct route with fewer stops. As a result, CP can now ship containers from Vancouver to Toronto in four days instead of five. Shipping to Chicago also takes four days, down from six. CP Rail is a buy....