CP

CANADIAN PACIFIC RAILWAY LTD. $70 (Toronto symbol CP; SI Rating: Average) stands out as a great choice for investors who want growth and safety. It transports freight over a rail network between Montreal and Vancouver. In the United States, subsidiaries connect CP’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 December 31, 2007, CP’s earnings rose 2.2%, to $185 million from $181 million. Per-share earnings rose 4.3%, to $1.21 from $1.16 on fewer shares outstanding. Revenue was virtually unchanged, at $1.2 billion. CP will probably spend $5.80 a share on capital upgrades in 2008, unchanged from 2007. CP’s $1.58 billion acquisition of Dakota, Minnesota & Eastern Railroad Corp. (DM&E) in September, 2007 is adding to earnings. DM&E operates a 4,000-km rail network in eight Midwestern states, mainly transporting agricultural products, coal and ethanol to key ports such as Chicago and Minneapolis. CP will likely win regulatory approval for the takeover later this year....

BANK OF MONTREAL $54.32, Toronto symbol BMO, has announced several charges that will cut its earnings when it reports results for its first fiscal quarter ended January 31, 2008. The charges will total about $325 million or $0.70 a share, and consist mainly of writedowns of asset-backed securities and higher loan loss provisions. The bank earned $2.9 billion or $5.66 a share before unusual items in fiscal 2007. Bank of Montreal has now pledged roughly $12 billion U.S. to support two of its structured investment vehicles holding asset-backed securities. The extra liquidity should help them dispose of these assets in an orderly manner. These assets have minimal exposure to U.S. subprime mortgages, and Bank of Montreal feels the risk of loss is low. While the possibility of further writedowns adds risk, Bank of Montreal remains well capitalized....

SAPUTO INC. $28.15, Toronto symbol SAP, has agreed to buy the operations of Wisconsin-based Alto Dairy Cooperative, which makes cheeses under a variety of brand names and private labels. The $160 million U.S. price is 22% more than the $131.0 million (Canadian) or $0.63 a share that Saputo earned in the six months ended September 30, 2007. The new operations should expand revenue at Saputo’s U.S. operations by 20%. The company has a strong history of successfully integrating new operations, which helps cut the risk of expanding through acquisitions. Saputo is a buy....

CANADIAN PACIFIC RAILWAY LTD. $66 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 153.2 million; Market cap: $10.1 billion; SI Rating: Average) has also run into problems with its plan to buy a U.S. railway. In September 2007, it agreed to pay $1.48 billion U.S. for Dakota, Minnesota & Eastern Railroad Corp. (DM&E), which operates a 4,000-km rail network in eight Midwestern states. DM&E mainly transports agricultural products, coal and ethanol to key ports such as Chicago and Minneapolis. CP also plans to spend $300 million U.S. to upgrade DM&E’s tracks and railcars. This is a big investment for CP, which earned $603.9 million (Canadian) or $3.87 a share in the first nine months of 2007. Like CN, this acquisition also faces local opposition. While this will prolong the regulatory review process, CP will likely win approval for the takeover....

The shares of Canada’s two big railways, CN and CP, have moved down in the past six months due to concerns that the high Canadian dollar would hurt export volumes. However, both are taking advantage of the high dollar to expand their operations in the United States. While these acquisitions have run into opposition from environmental groups and others, they should eventually win regulatory approval. CANADIAN NATIONAL RAILWAY CO. $51 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 494.5 million; Market cap: $25.2 billion; SI Rating: Above average) has agreed to buy a major portion of a 319-km railway near Chicago for $300 million U.S. The company also plans to invest $100 million U.S. to expand capacity on the new line. To put these figures in context, CN earned $485 million (Canadian) or $0.96 a share in the third quarter of 2007. This lightly used line would let CN bypass heavy rail traffic in Chicago. However, the company’s plan to increase volume on these tracks has encountered strong opposition from local municipalities. CN had hoped to complete the purchase in early 2008. But an environmental review could delay the transaction by about 18 months....

CANADIAN PACIFIC RAILWAY LTD. $70 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 153.1 million; Market cap: $10.7 billion; SI Rating: Above average) transports freight over a rail network between Montreal and Vancouver. In the United States, subsidiaries connect CP’s Canadian lines to major hubs in the Midwest and Northeast. Alliances with other railways extend its reach to Mexico. CP’s revenue rose from $3.7 billion in 2002 to $4.6 billion in 2006, largely due to the expansion of trade with Asia. Profits fell from $3.06 a share (total $487.5 million) in 2002 to $2.52 a share ($401.3 million) in 2003 due to higher fuel costs....

One of the most powerful ways to succeed as an investor is to disregard market turbulence like today’s, in which there is a large random factor. Instead, buy companies with hidden assets such as high research spending, under-utilized real estate and brand names, and dominant market positions. It can take years before hidden or little appreciated assets begin to generate earnings for the company or capital gains for its investors. But eventually, hidden assets will pay off. In the meantime, they cut your risk of permanent loss. In July, takeover rumours helped push CP Rail up to a new all-time peak. A potential bidder saw CP’s land holdings as a hidden asset. Skeptics point out that this land is beneath railway tracks, and unsuitable for residential housing. However, warehousing is another story. Pessimists also overlook the hidden value of CP’s cost-cutting plan, and its key role in Canada’s economy. Both fuel earnings growth and cut risk....

CANADIAN PACIFIC RAILWAY LTD. $78.20, Toronto symbol CP, shot up to $91 in mid-July on takeover speculation, but it has now moved back down to where it was when the speculation began. This is due to the market downturn since then, plus rising doubt on the odds of a takeover. Potential bidder Brookfield Asset Management wanted to break CP into two pieces, railways and real estate. It felt this would let it generate enough extra value to pay a high price for the company and still come out with profits for itself. But CP says it has already considered this kind of breakup and restructuring, and concluded that it may not generate enough value to make it worthwhile. This could simply mean that CP management and Brookfield are using different assumptions in their analysis of the plan. The difference may also reflect a potential conflict of interest: CP managers may want to hang on to their jobs and Brookfield may want to replace them....

CAE INC. $14 (Toronto symbol CAE) has opened a new $100 million U.S. pilot training centre in New Jersey. The company will also install $60 million U.S. worth of new flight simulators at this site. To put these costs in perspective, CAE earned $129.3 million (Canadian) or $0.51 a share before unusual items in the fiscal year ended March 31, 2007. However, problems in the U.S. airline industry and the rising Canadian dollar could hurt CAE’s growth. Hold. CANADIAN PACIFIC RAILWAY CO. $75 (Toronto symbol CP) has reached a new three-year deal with its unionized track workers that will end a three-week strike. The company did not reveal the specifics of the new contract, but labour peace helps cut CP’s risk. Buy. TECK COMINCO LTD. $48 (Toronto symbol TCK.B) is helping junior mineral exploration company Benton Resources Corp. develop a new nickel-copper find 60 km north of the massive Voisey’s Bay nickel deposit in Labrador. There’s no guarantee the project will make money, but deals like this give Teck a low-risk way to participate in promising new discoveries. Buy....

CANADIAN NATIONAL RAILWAY CO. $56 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 510.2 million; Market cap: $28.6 billion; SI Rating: Average) operates a 32,000-km freight railway network across Canada, and south to the Gulf of Mexico. It hauls a variety of goods, including oil, metals, grain, forest products and manufactured products. CN’s revenue fell from $6.1 billion in 2002 to $5.9 billion in 2003, but grew to $7.7 billion in 2006 partly due to acquisitions. Per-share profits rose from $0.91 in 2002 to $3.40 in 2006. Perhaps CN’s most important purchase in the past few years was BC Rail Ltd. The deal expanded CN’s presence in Western Canada, and gave it exclusive rail access to the port of Prince Rupert, which is closer to Asia than other west coast ports....