We are currently maintaining our long-term Neutral rating on Canadian Pacific Railway Limited (CP), the largest rail network in Canada, supported by a Zacks #3 Rank (Hold).

Canadian Pacific, together with its subsidiaries, operates a transcontinental railway in Canada and the U.S., with freight transport being a major source of its revenue.

We believe Canadian Pacific is benefiting from strong growth in each of its product lines, particularly Coal and Intermodal. Despite the choppy economic recovery, the company remains on track to produce an operating ratio in the low 70’s over the next three-to-five years. Canadian Pacific is focusing on structural cost savings by consolidating eleven service areas into six. This consolidation is expected to fuel profits and margins in 2011.

Canadian Pacific also plans to invest approximately C$950 million to C$1,050 million in capital programs over the year. These include track maintenance and expansion programs, volume growth and productivity initiatives, network enhancement upgrade information technology systems, Positive Train Control (PTC) implementation as well as $100 million investment in North Dakota. We believe the investment will lead to increased profitability and improve the company’s route structure and network.

In October 2010, the company entered into a 10-year contract with Teck Resources Limited, Canadian Pacific’s biggest customer, to transport Teck’s steel making coal from its five mines in southeast British Columbia to Vancouver ports. We believe the agreement will lead to growth in coal volumes in 2011 and solidify the company’s presence in the export market.

However, Canadian Pacific faces significant competition for freight transportation in Canada and the U.S., including some of its biggest rivals like Canadian National Railway Company (CNI) and Norfolk Southern Corp. (NSC). Further, the company remains exposed to factors like steeply rising fuel prices, highly unionized workforce and regulatory pressures such as PTC implementation, which may drag down the company’s performance in the future.

 
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