CP Rail (CP) shares have been very choppy these past few months, with the ongoing race against CN Rail (CNI) for the right to acquire U.S. railway Kansas City Southern (KSU), in a deal that looks to be worth at least $27 billion.
Despite recent volatility, I remain mildly bullish on CP stock, as its prospects of acquiring KSU have now improved drastically.
With the latest unanimous rejection of a potential CN-KSU deal by the STB (Surface Transportation Board), which essentially crushes the acquisition hopes of CN Rail, it seems like a deal is now CP’s to win.
CN was the much larger railway, and with that, the STB clearly saw a CN-KSU combination as one that would have a negative impact on the transportation industry’s competitive landscape.
In essence, CN Rail has been knocked out of contention, leaving CP Rail a chance to finally ink a deal that’s been mired in a bitter back-and-forth between the two Canadian railway companies. (See CP stock charts on TipRanks)
Canadian Railways under Pressure as Bidding War Concludes
On the initial news of CN’s derailed KSU acquisition hopes, shares of CP Rail actually dropped.
All the while, CN Rail stock rocketed by a double-digit percentage in the following days.
Recent stock price moves suggest that the winner of KSU will be left holding the bag. Indeed, big acquisitions come with a side of risk. The higher the premium, the greater the risk that shareholders will have to bear.
With a likely CP-KSU merger under the microscope, CP investors should expect nothing less than continued volatility. With shares of CP fluctuating in both directions, investors would be wise to scale in only if they are intent on adding to a long-term position.
Clock Ticks for KSU Shareholders
CP Rail is a wonderful business, with a wide economic moat. Over the near-term, the stock price is likely to be moved by the outcome of the proposed CP-KSU deal. Recently, CP gave shareholders of KSU a deadline.
With CN likely out of the game, KSU investors have a tough decision to make. Should a CP-KSU deal also end up falling through, CP Rail stock could have immense upside, and could sharply bounce back to all-time highs, just as CN Rail stock did once its deal hopes were squashed by the STB.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CP stock comes in as a Moderate Buy. Out of 12 analyst ratings, there are seven Buy recommendations, and five Hold recommendations.
The average CP price target is $83.32. Analyst price targets range from a low of $77.59 per share, to a high of $91 per share.
Disclosure: Joey Frenette owned CN Rail shares at the time of publication.
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