Watch: CP, Element Fleet and Transcontinental

Element Fleet Management, which counts Amazon among its clients, seems well positioned so that its growth is not penalized too much by the macroeconomic environment, believes Geoffrey Kwan of RBC Capital Markets. (Photo: 123RF)

What to do with the titles of Canadian Pacific, Element Fleet Management and Transcontinental? Here are some recommendations from analysts likely to move prices soon. Note: the author may have a totally different opinion from that expressed by the analysts.

Canadian Pacific (CP, $107.43): the future is brighter than its title suggests

The additional revenue from the merger between Kansas City Southern and Canadian Pacific, which is preparing to combine their operations, could be even greater than expected, believes Kevin Chiang of CIBC World Markets.

The Calgary Railroad estimates it should generate earnings before interest, taxes, depreciation and amortization (EBITDA) of US$1 billion over the next three years. Of this number, US$820 million (M) will come from the opportunities it will be able to seize, and US$180 million will be from the savings it will achieve and the efficiency it will gain.

The merger will notably facilitate the transport of bitumen from Alberta to the Gulf of Mexico, will gain market share for the export of grain from the United States to Mexico, or will also shorten certain routes between two destinations.

To achieve such EBITDA from these synergies, this means the new entity will generate approximately US$1.1 billion in additional revenue over the next three years, according to the analyst’s calculations.

However, Canadian Pacific has a habit of making more cautious promises, and of greatly exceeding expectations, he recalls. Indeed, points out Kevin Chiang, despite the pandemic which affected its delivery volume in 2020, the company managed to surpass the financial targets it set for itself in 2018.

And if it manages to do so well, it is thanks to its ability to gain market share, says the analyst.

Although Kevin Chiang believes that the additional revenues expected by Canadian Pacific and Kansas City Southern are conservative, he admits that it is difficult to determine how conservative these forecasts are given the uncertainty caused by the economic slowdown.

Nevertheless, he attempted to compare the combined revenues per revenue ton-mile of this new network with those of its rivals. The approach is simplistic, he agrees, but it is based on the idea that the larger a network is, the better it can take advantage of the greater opportunities to create wealth.

According to his calculations, the merger of the two companies should generate revenues of nearly $15 billion thanks to synergies. Without them, the income of the two companies would reach $11.4 billion. The potential is therefore greater than the billion dollars announced by the company.

The analyst believes that this network that connects Canada to Mexico is promising, and that it is well positioned to outperform the largest rail carriers well beyond the three years it will take to profit of this acquisition.

To better represent his new expectations with regard to the stock’s performance, the analyst has raised his target price from $110 to $120. According to him, the future is much brighter than what the value of his title currently reflects.

Element Fleet Management Corp (EFN, $18.93): A safe bet in uncertain times

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