CP Rail $CP Gets Upgrade on Prospect of New CEO

Canadian Pacific Railway (CP) “was upgraded to neutral from underweight at JPMorgan on raised expectations that Hunter Harrison will become CEO,” reports the Financial Post. In the letter Bill Ackman sent to CP on Monday, he discussed Harrison, pointing to his tenue and accomplishments, as an important part of driving improvement at CP (read the letter here).

While Harrison’s role in CP is not confirmed, “JPMorgan analyst Thomas Wadewitz believes the increased probability of him becoming CEO of CP is a source of upside potential for the stock” – enough to warrant an upgrade. Wadewitz increased his one year target estimate for CP to $74, up from $60. CP is currently trading at $68.67 a share. “If Mr. Harrison is appointed CEO, it would provide a clear catalyst for operating improvement and margin expansion at CP,” said Wadewitz.

Wadewitz said that “there is an opportunity for CP to improve its operating ratio – an important gauge of the railway’s efficiency measuring its operating expenses as a percentage of its sales – under the guidance of Mr. Harrison.” CP’s operating ratio is around 82%. Wadewitz thinks that “Harrison could potentially reduce that to 70% in his base case, and 65% in his aggressive scenario, which would translate into earnings per share of US$7.24 in the base case and US$8.64 in the bull case by 2015, along with annual stock appreciation of 11% and 18%, respectively.”