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Canadian Pacific Railway Limited: What Investors Should Know for 2015

Canadian Pacific Railway Limited (TSX: CP)(NYSE: CP) is up 40% in 2014 and investors are trying to decide if they should take some money off the table or hang on for the ride right through 2015.

Let’s take a look at the current situation to see if the company deserves to be in the portfolio.

Crude transportation

Oil producers are taking it on the chin these days and some pundits are concerned that Canadian Pacific will see a slowdown in demand for oil shipments. High-cost producers in the Bakken shale play will certainly run into trouble in the coming year, but oil production coming out of the oil sands is set to continue its growth.

Pipeline bottlenecks are still forcing oil producers to use rail transport to get their product to the best-priced market. Canadian Pacific recently confirmed it expects to see oil deliveries in 2015 of about 200,000 carloads. That would be a 70% increase of the expected 2014 total for the company.

Crude deliveries at Canadian Pacific represented about 8% of revenue in the first three quarters of 2014.

One risk for the oil segment is increased regulation. Canadian Pacific plans to improve revenue and margins by running its trains faster and making them longer, but new safety requirements for oil-by-rail transport could impact operating costs and slow revenue growth moving forward.

Grain transport

Canadian Pacific plays a key role in helping Canadian farmers move their crops out of the prairies to both international and U.S. markets. Demand is so strong that the Canadian government had to force both Canadian National Railway Company and Canadian Pacific to deliver a fixed amount of grain per week during the critical harvest time of August through the end of November.

Farmers consistently complain that there is not enough rail capacity available. This is unfortunate for growers, but it means grain deliveries continue to be a strong revenue generator for Canadian Pacific.

Canadian winters are unpredictable, and bad weather can cause grief for Canadian Pacific along its grain routes. In the past, heavy snowfall has disrupted rail routes headed to the Pacific coast. Another bad winter in 2015 could put a dent in earnings for the first part of the year.

Intermodal transport

Railways have been gaining traction in the market for long-haul intermodal transport. Truckers have always dominated the movement of goods from ships to their inland destinations, but efficiency gains have enabled Canadian Pacific to win more of these contracts.

The recent drop in oil prices means diesel fuel will be less expensive in the coming year. This should help the trucking companies compete against Canadian Pacific for the intermodal business. The shift may already have started as Canadian Pacific saw a meaningful drop in its international intermodal revenue in the third quarter.

Should you buy?

Canadian Pacific is a good long-term bet, but the stock is expensive. The company currently trades at about 35 times earnings, which is a significant premium to Canadian National Railway. Any missteps on the earnings side could trigger a selloff.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National is a recommendation of Stock Advisor Canada.

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