Thursday, March 17, 2011

Canadian Pacific Railway

The first thing to discuss is the recent account rule changes. The FASB (Financial Accounting Standards Board) and such board to various countries together with the IASB (International Accounting Standards Board) make changes on how companies can do their financial statements. Often with these changes, companies also restate previous results. Sometimes these can be substantial. For this company, their book value under new rules decreased by almost 30%.

Book Value is theoretically the break up value of the company or the shareholders’ net value in the company. It is an important measure of the company’s progress to look at the growth in book value. However, this is really only in theory as companies in financial difficulties usually lose their shareholders’ value if they are going bankrupt. So at the point of bankruptcy this value does not seem to matter much. Hopefully, you are out of a stock before this happens. However, it is an important measure of the value of the company to the shareholders.

New accounting rules can affect a number of my measurements as I use accounting values on my spreadsheets. These changes will not stop me from using these values, but it is important to understand, that they are not absolute as they can change and some times change a lot with new accounting rules. Looking at various values like book value, revenue, earnings etc can give you an idea of where a company is going and where it is currently. This is, of course, to give a feel for where the company was and is going. It is never meant to be absolute. Accounting is often more art than science.

In investing, it is handy to have a feel for the past and present, but you also want to look at the future too. Analyst’s reports and news items are a good place to look about what the company may do in the future. I also look at analysts’ recommendations. I look at the range of recommendations as well as the consensus recommendation. Most consensus recommendations are a Buy and a few are a Hold. You seldom get other consensus recommendations, but they do happen.

Another place to look for what is in the company’s future is the annual statement. Look at parts that cover such things as management discussion and analysis. Look for messages from the President and other executives.

Of course, none of this stuff is absolute. That is why you want to diversify your portfolio. It is also, why you do not let any one stock get to be a too big of percentage of your portfolio. My limit is 10%. I have sold off good companies, like SNC-Lavalin because it grew so much. It grew to a higher percentage of my portfolio than I was comfortable. SNC-Lavalin is still a great company and I still have a good investment in it, but I still cannot afford to have too much in it because it could really damage my portfolio is anything happens to it.

I should also mention that I seldom change past accounting figures. I know that sites that give you accounting values change past ones when they are restated. The Globe and Mail site comes to mind in this. See CP Financials. My approach is almost never to change values because of restatements in financial statements. Although, I must admit that when I do a new spreadsheet, I use financial statements to do two years at a time.

My goal is for the spreadsheets to provide me with a good idea on how the company is doing. Besides, there are no absolutes in life. I also wonder if investing may be more art than science. I remember being at a party and a man I know well talked about his new investment. I had an investment in that company also, which I sold. What was my reasoning for this? Whatever company he invested in, it seemed to have difficulties after he invested in it.

Tomorrow, I will talk about what my spreadsheets says about this company.

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. Northeast and Midwest 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 here CPR. See my spreadsheet at cp.htm.

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 for stocks followed and investment notes. Follow me on twitter.

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