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
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
2. Canadian National Railway
3. Norfolk Southern
5. Canadian Pacific Railway Limited
6. Kansas City Southern
7. Westinghouse Air Brake Technologies
8. Genesee & Wyoming
9. Guangshen Railway
10. Trinity Industries
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.