Can Canadian Pacific's Cost Controls Position It To Rise Again?

Canadian Pacific Railway Limited (USA) (NYSE: CP) reported earnings Wednesday, resulting in a mixed reaction. Initially, traders reacted positively to the company's Q2 adjusted earnings per share of $2.05 vs. $2.04 estimates and $1.45 billion sales vs. $1.47 billion estimates; however, a Buckingham downgrade sent shares down the next day.

UBS' Take

Unlike Buckingham, United Bank of Switzerland's Thomas Wadewitz maintains Canadian Pacific's Buy rating, while raising the price target from $193.00 to $225.00.

Cutting Costs And Strengthening Margins

Wadewitz applauded the company's recently reported progress cost actions, reducing their headcount during the second quarter by 455 people. Since the end of June, headcount has fallen another 90 people, according to Wadewitz.

Canadian Pacific's earnings conference call "showed the significant cost actions that CP has taken and how this could position them to realize strong margin improvement in 2H16 as the trend in their volumes becomes more constructive," said the UBS analyst.

Related Link: A Summary Of BMO Capital's Coverage On The Rail Sector

Increased Visibility Leading To Greater Confidence

Canadian Pacific's contract agreements between "key potash producers and large global consumers have provided more visibility to a "meaningful" increase in 2016 potash shipments, according to Wadewitz.

Strengthening Industry Data

Weekly rail volume has shown an improvement for Canadian Pacific's coal and U.S. grain volumes, pointing to stronger bulk volumes in the second half of 2016, stated Wadewitz. The analyst believes Canadian Pacific's visibility, however, was foggy outside major bulk segments such as grain, coal and potash.

The UBS analyst noted the 18 percent increase in grain cars showing strength in the sector.

According to TipRanks, Wadewitz is among the best analyst's covering Canadian Pacific and has one of the highest price targets for the company. The analyst has a success rate of 59 percent and an average return per recommendation of +6.4 percent.

At time of writing, Canadian Pacific traded at $149.00, flat in Friday's pre-market session.

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