Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) has been struggling to break through the $200 level for quite some time. Hunter Harrison left his position as CEO sooner than expected this week while forfeiting $118 million worth of benefits. Keith Creel will step into Harrison’s place at the helm of Canadian Pacific. The stock looks to rebound from what’s been a tough few years.
Keith Creel has been the right-hand man of Hunter Harrison for over 20 years. He’s got the experience needed to run the company, but there may be bigger issues that are out of his control. Activist investor Bill Ackman dumped his stake in the company. Should you follow in his footsteps?
The Q4 quarter was quite impressive as the company reported a $3.04 EPS, which beat analyst expectations by $0.66. The company also beat revenue expectations by reporting $1.64 billion, which was $380 million more than what analysts predicted. There’s no question this quarter was an improvement over Q3, which was very underwhelming. Q3 saw its revenue fall 9% year over year with carloads and freight revenues dropping by 3% and 7%, respectively.
While the earnings would have supported a nice rally to higher levels, I believe the early departure of Hunter Harrison is something to be worried about. Canadian Pacific may have its back against the wall in terms of growth, and the recent earnings beat was only due to an improvement in the Canadian economy.
Hunter Harrison was a relentless cost-cutter during his time at Canadian Pacific. The company was able to produce fantastic results each year because of the effect that the cost cuts had on the top line. This was a great medium-term strategy for the company, but there are no more areas to cut costs without affecting the long-term profitability of the business. Cost-cutting only goes so far, and Canadian Pacific will need another strategy to command its high price-to-earnings multiple of six.
There’s no question that the company isn’t the growth machine that it was a few years ago. The management team will need new growth initiatives other than cost-cutting if the stock is to move anywhere in the near future. Many pundits believe the stock is severely overvalued and a huge 45% correction may be in the books. I don’t think the stock will crash that hard, but I do agree that the stock is ridiculously overvalued at current levels.
I don’t believe the company can support the level of growth to support such a high valuation. The stock will most likely remain flat for another year before finally breaking above its $200 resistance level. Canadian Pacific commands a premium to its peers, and there’s no real reason as to why. The company is too expensive and I would avoid it, as there are no real catalysts for the stock to rally higher.
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Fool contributor Joey Frenette has no position in any stocks mentioned.