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Could CP’s Domestic Intermodal Freight Business Thrive in 2016?

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Domestic intermodal

Canadian Pacific’s (CP) domestic intermodal business includes diverse industries such as food, retail, less-than-truckload shipping, trucking, forest products, and various other consumer-related products. CP derives most of its domestic intermodal business from Canada. In the United States, CP’s service is delivered primarily through wholesalers. This division contributed to approximately 12% of CP’s 2015 revenues.

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Future insights

Canadian Pacific’s domestic intermodal growth has been hit by a slowdown in the Canadian economy. However, CP’s rival in Canada, Canadian National Railway (CNI), also reported weaker intermodal growth in line with the Canadian economy’s growth. Increased truck capacity in CP’s short-haul lane will most likely result in tough competition going ahead.

Bloomberg, in its North American 2016 transportation outlook, has predicted a slowdown in domestic intermodal growth. In sharp contrast, the Intermodal Association of North America says it expects 3% to 4% growth for total intermodal volume in 2016, with mostly domestic traffic. We believe that the current low-fuel cost environment will prove to be supportive for truckers. It will add to their competitiveness in delivering time-sensitive and value-added commodities. This may prove disadvantageous to railroads.

Peer group prospects

In recent years, the intermodal space has grown considerably, to the benefit of all Class I players. CP’s rival Canadian National Railway (CNI) also rode high on domestic intermodal growth in the recent past. Norfolk Southern (NSC) expects to reaccelerate domestic intermodal growth into 2016 amid a lost share in intermodal rail service. Investors should note that NSC recently restructured its underperforming subsidiary, Triple Crown Services, which was providing intermodal services.

CSX (CSX) expects growth in its domestic intermodal business in 2016. CP’s other US peers include Kansas City Southern (KSU), Union Pacific (UNP), and Genesee & Wyoming (GWR). With the stabilization of crude oil prices, the conversion of highway-to-rail will catch up in the near future. This will most likely result in good domestic intermodal prospects for railroads.

All of the companies mentioned above, except GWR, are part of the US Class I railroad group. The iShares Transportation Average ETF (IYT) invests 22.2% in Class I railroads excluding CP and CNI. This ETF also holds 11.5% in trucking companies. In the concluding part of our series, we’ll discuss CP’s international intermodal freight prospects in 2016.

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