Friday, March 5, 2010

Canadian Pacific Railway 2

I am today reviewing this stock, (TSX-CP) because it has published its fourth quarterly results and I own this stock. I have owned this stock since October 2006 and I have made a return of 0% per year on my shares. The reason is the current recession and this will not last forever. The main difference between CNR and CP is that CP has kept their dividends flat since 2008.

The first good thing about CP stock is that there has been some insider buying. There was not much, just some 200K, and it was all done in 2009, but it was there. This is too small of an amount to be significant. The negative that I see is that insiders have far more stock options than share.

If you look at the 5 year average P/E low, it is just 9.6 and the 5 year average high is 15.4. The current P/E that I get is 16.7. The sites that use the last 12 months of earnings to get a P/E get one just above 15, but no one seems to think that this company will earn as much in 2010 as it did in 2009. The other thing is that even using the last 12 month earnings in the P/E calculation, you still get a P/E that is at the 5 year average high.

When you look at the Graham Price, I get one for 2009 that is $57.38 and one for 2010 that is $55.23. The Graham Price also uses an estimate of earnings to come up with a value. However, the current stock price is approximately at the Graham Price. This is usually a good price, but besides using absolute values when valuing stock prices, you need to also use relative values. The stock price on this stock has often been below the Graham Price. The low stock price over the past 10 years has been some 28% lower than the Graham Price. If you look at an average of the high and low stock prices, even here, the average high/low stock price has been some 10% lower than the corresponding Graham Price.

It is only looking at the Price/Book Value ratio where the current price might be shown to be good. The current Price/Book Value Ratio of 1.42 is lower than the long term average by 10%. (Although, for a price is be good, you want to have a current Price/Book Value ratio 20% lower than the long term average.) The last thing to look at is the dividend yield. The current dividend yield of 1.75% is higher than the long term average of 1.57%. However, to show a very good stock price, you would want the dividend yield to be higher than the long term high. The long term high is 1.99% and this is higher than the current dividend yield.

When I look at analysts recommendations, I find that this stock has recommendations from Strong Buy to Sell and everything in between. However, everywhere I look there are far more Hold recommendations than anything else. Although there are a number of Buy recommendations, I can find only one of each of the Strong Buy, Underperform and Sell ratings. The consensus recommendation is a Hold. (See my site for information on analyst ratings.) Some analysts feel this stock is a buy even though the P/E is higher than historical values because of its future earnings potential. Others do not find it attractive because of the lack of recent dividend increases.

As I said yesterday, I plan to continue to hold on to the shares I own. I feel that over the long term I will make a reasonable return on this stock. However, I would not be interested in buying more at the moment as I think the stock price is too high.

This company is a transcontinental railway operating in Canada and the U.S. Its rail network serves the principal centers of Canada, from Montreal to Vancouver and the U.S. north-east and mid-west regions. Alliances with other carriers extend its market reach throughout the U.S. and into Mexico. Canadian Pacific Solutions provides logistics and supply chain expertise. Its web site is See my spreadsheet at .

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at for a list of the stocks for which I have put up spreadsheets. Also, look at other investing notes on my website at Follow me on twitter.

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