This stock should benefit from Red Sea turmoil disrupting shipping, Redburn says
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The railroad Canadian Pacific Kansas City is poised to benefit from mounting disruptions to shipping in the Red Sea that are re-routing global trade routes, according to Redburn Atlantic. Shippers will increasingly utilize CPKC’s newly formed land bridge to move freight from the Port of Lazaro Cardenas on Mexico’s West Coast to the U.S. East Coast, analyst Oliver Holmes told clients in a research note Monday. The railroad’s land bridge through North America is an attractive alternative for cargo from Asia to the U.S. East Coast as the Suez and Panama canals face disruptions to traffic. Container shipping through the Red Sea was down 30% in mid December due to repeated attacks by Iran-allied Houthi militants in Yemen, Holmes told clients. Ships at the mouth of the Red Sea or on their way to and from the Suez Canal were down 90% in the first week of January, according to Holmes. Sailing around the Cape of Good Hope in Africa as an alternative to the Suez Canal increases transit time from Asia to the U.S. East Coast to 40 days from 28 days. Container ships moving freight from Asia to the U.S. East Coast could divert traffic to Panama Canal instead, but the waterway is suffering from low water and has restrictions in place on the number of ships that can transit daily. CPKC’s land bridge through Mexico north to the U.S. shortens transit time by 10 to 14 days compared to the Panama Canal, Holmes wrote. “This route is materially faster (10-14 days) than going through the Panama Canal, especially when there are restrictions in place,” he told clients. “We add that this was one of CPKC’s merger-derived growth drivers and, thus, we expect there to already be a strategy in place to capitalise on the current tailwind.” CPKC offers best-in-class earnings protection if the macroeconomic environment grows weak and the most compelling long-term earnings outlook among railroads, Holmes said. Analysts are underestimating the earnings contribution from Canadian Pacific’s recent merger with Kansas City Southern, he said. CPKC’s management expects earnings per share to double to CAD$8 from fiscal 2024 through fiscal 2028. Holmes and Redburn Atlantic estimate that the railroad’s stock price could roughly double to CAD$200 by 2028. U.S.-listed shares of the company are down about 3% in early 2024. CP YTD mountain CP in 2024
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