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Hedge fund guru Bill Ackman's Pershing Square Capital Management has a history of buying up companies he deems undervalued to turn them around. So investors are paying close attention to his newest target: Canadian Pacific Railway (NYSE: CP ) .
His fund disclosed on Friday that it has acquired a 12.2% stake in Canadian Pacific Railway and expects to hold talks with Canadian Pacific's management, board and other stockholders. According to the filing, the holding consisted of 20,659,504 common shares, including 2.65 million common shares through call options.
Right now, the railroad operates on a 14,800-mile network that extends from the Port Metro Vancouver on Canada's Pacific Coast to the Port of Montreal in eastern Canada, and to several industrial centers in the United States. The train line transports bulk items as well as limited passenger services though the luxury Royal Canadian Pacific service.
"The key questions on the minds of investors will be to what extent Pershing Square will be able to trigger significant change," says Walter Spracklin of RBC Capital Markets in Toronto in a note to clients. He said the shares may rise as high as C$80 in a year, up from a projected C$66, and recommends buying them.
Bloomberg reports, "the carrier has lagged behind North American peers this year, falling 4.5 percent through Oct. 27, the day before Pershing Square's stake was disclosed. Canadian National Railway, the country's largest railroad, climbed 20 percent in the same period, and Standard & Poor's 500 Railroads Index of three U.S. carriers advanced 11 percent."
Questions have also come up regarding prospective buyers for the company, such as Warren Buffett's Berkshire Hathaway, or a Canadian pension plan. Due to government regulations, sale to another railroad is considered to be unlikely.
Motivation behind investment
Business Insider reports the motivations behind the investment as suggested by Jefferies analysts Peter Nesvold, Tavio Headley, and Elliott Waller: "We think there are three basic motivations for an activist to step into CP: (1) to passively invest in the company's turnaround; (2) to press CP mgmt to be more aggressive on price; or (3) to urge CP to consider a strategic tie-up of some sort."
Do you think Bill Ackman's investment in Canadian Pacific Railway could spur investors to put other railroad stocks on their radar? Do you think Ackman is correct in his assumption that CP is undervalued? And if so, could other railway companies be undervalued as well?
If you're interested in following the trends of railroads, we list the biggest railroad stocks here. (Click here to access free, interactive tools to analyze these ideas.)
1. Union Pacific (NYSE: UNP ) : Market cap of $49.28B. Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, provides rail transportation services in North America. Share price as of 10/31 at $100.15. The stock has had a couple of great days, gaining 5.22% over the last week.
2. Canadian National Railway (NYSE: CNI ) : Market cap of $35.67B. Engages in the rail and related transportation business in North America. Share price as of 10/31 at $79.14. The stock has had a couple of great days, gaining 7.56% over the last week.
3. Norfolk Southern (NYSE: NSC ) : Market cap of $26.08B. Engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. Share price as of 10/31 at $74.58. The stock has had a couple of great days, gaining 5.75% over the last week.
4. CSX (NYSE: CSX ) : Market cap of $24.26B. Provides rail-based transportation services. Share price as of 10/31 at $22.35. The stock has had a couple of great days, gaining 5.72% over the last week.
5. Canadian Pacific Railway Limited (NYSE: CP ) : Market cap of $10.94B. Provides rail and intermodal freight transportation services. Share price as of 10/31 at $62.56. The stock has had a couple of great days, gaining 10.64% over the last week.
6. Kansas City Southern (NYSE: KSU ) : Market cap of $7.14B. Engages primarily in the freight rail transportation business. Share price as of 10/31 at $63.55. Exhibiting strong upside momentum--currently trading 10.13% above its SMA20, 18.44% above its SMA50, and 16.96% above its SMA200. The stock has had a couple of great days, gaining 9.22% over the last week.
7. Westinghouse Air Brake Technologies (NYSE: WAB ) : Market cap of $3.34B. Provides technology-based equipment and services for the rail industry worldwide. Share price as of 10/31 at $67.65. Exhibiting strong upside momentum--currently trading 13.15% above its SMA20, 16.45% above its SMA50, and 10.42% above its SMA200. The stock has had a couple of great days, gaining 12.58% over the last week.
8. Genesee & Wyoming (NYSE: GWR ) : Market cap of $2.61B. Operates short line and regional freight railroads, and provides railcar switching services in the United States, Canada, Australia, the Netherlands, and Belgium. Share price as of 10/31 at $59.93. The stock is a short squeeze candidate, with a short float at 6.05% (equivalent to 7.96 days of average volume). The stock has had a couple of great days, gaining 10.12% over the last week.
9. Guangshen Railway (NYSE: GSH ) : Market cap of $2.50B. Provides passenger and freight transportation services on the Shenzhen-Guangzhou-Pingshi railway in the People's Republic of China. Share price as of 10/31 at $17.42. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.92%, current ratio at 1.8, and quick ratio at 1.71. The stock has had a couple of great days, gaining 7.15% over the last week.
10. Trinity Industries (NYSE: TRN ) : Market cap of $2.28B. Provides products and services to the industrial, energy, transportation, and construction sectors primarily in the United States, Canada, Mexico, the United Kingdom, Singapore, and Sweden. Share price as of 10/31 at $27.46. This is a risky stock that is significantly more volatile than the overall market (beta = 2.52). The stock has had a couple of great days, gaining 5.34% over the last week.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Data sourced from Finviz.