There are North American railway companies Buffett is yet to buy into.
Canada, the land of the Maple Leaf where the Mounties always get their man, is a fully-paid up member of the Anglosphere and shares a common culture and heritage with Britain which dates back several hundred years.
When compared to the rest of our former Empire, British contacts with Canada are surprisingly thin on the ground however.
Australia, New Zealand, South Africa and the sub-continent are well represented through sports and immigration whilst the British media treats American news with such importance that it can make you wonder if we aren't already the 51st State.
Whilst some of our TV channels are filled with American shows and Aussie soaps, Canada's top comedy, Corner Gas, has never been seen on British TV (can you remember ever watching a Canadian TV show?).
Canada doesn't feature on the radar of most British investors, who when metaphorically crossing the Atlantic think only of the US. But Canada has a lot to offer to investors, as it has a highly developed economy with a particularly large natural resources sector.
One company which services much of Canada's economy and looks set to profit as the global economy comes out of recession is the Canadian Pacific railway. If you're a Winter Sports fan you might like to know that the 2010 Winter Olympic Games start in Vancouver on 12 February and Canadian Pacific is the games' official rail freight sponsor.
The Trans-Continental Railway
The origins of the Canadian Pacific railway date back to the 1870s, when the decision was taken to connect the province of British Colombia to the rest of Canada by a trans-continental railway.
Canadian Pacific was formed in 1881 and only four years later trains were running from Montreal in the east to Vancouver in the west. In recent years Canadian Pacific has expanded into America by buying smaller railroads and its routes now reach many major population centres including Chicago, Kansas City, Minneapolis, New York and Philadelphia.
More than 97% of Canadian Pacific's income comes from shipping freight over its own network which consists of some 14,000 miles of track and related infrastructure. This makes it a vastly different business from British railway operators such as FirstGroup (LSE: FGP) who have to pay the publicly-owned Network Rail for track access, get most of their income from passenger traffic and whose operational franchises which regularly come up for renewal.
It is exceptionally difficult for a new competitor to challenge any existing North American railway company by establishing a rival rail network. This is because of the need to buy sufficient land and obtain planning permission before laying down any track. So a company's existing network acts as a major deterrent to anyone who is thinking of setting up a new railway. Consequently today's Canadian rail freight market is a duopoly consisting of Canadian Pacific and its larger competitor the Canadian National Railway.
However, railways can extend their networks and Canadian Pacific is planning to do this by building a new line into the coal-rich Wyoming Power Basin following its recent purchase of the Dakota, Minnesota & Eastern Railroad. Coal should become an increasingly important global energy source in the medium-term as an alternative to expensive oil and Canadian Pacific will be ready and waiting to ship it to customers.
Railways Trump Trucks
A very strong argument in favour of investing in North American railways has emerged over the last couple of years. First of all, today's high oil prices are likely to be with us for some time to come and at these prices railways have a major cost advantage over trucks when moving long-distance freight (railways have much lower average costs over long distance routes).
The second part of the argument is that China's rise towards superpower status by the mid-21st century is shifting the focus of the global economy towards to the Pacific Rim. China needs raw materials; Canada is ideally placed to supply these and these exports will need to be transported to Canada's west coast for shipping. In return, China will export manufactured goods to Canada and America which then need to be transported to their final destinations.
Warren Buffett clearly supports this theory since his company Berkshire Hathaway recently bought the Burlington Northern Santa Fe railway in a deal which valued BNSF at $44 billion. So whilst BNSF serves the traffic between America's western and mid-western states, Canadian Pacific is ideally placed to do the same for all of Canada and much of the north of America.
Show Me The Money
Canadian accounting is very similar to American accounting, which means that it's similar to British accounting with quarterly reporting. There's an added bonus; as Canada is a bilingual country, if you want the practice, you can get company reports in French!
Canadian Pacific's five-year record is shown below (all figures are in Canadian dollars):
| Year | 2009 | 2008 | 2007 | 2006 | 2005 |
|---|
| Earnings per share | 3.67 | 3.91 | 6.08 | 5.02 | 3.39 |
| Dividend per share | 0.99 | 0.99 | 0.90 | 0.75 | 0.58 |
| Total Revenue (billions) | 4.2 | 4.8 | 4.7 | 4.6 | 4.4 |
As you can see, profits took a bit of a hit in 2008 and 2009 as the global recession bit. The current share price of $51 puts Canadian Pacific's shares on a P/E ratio of 13.9, paying a dividend of just over 1.9%, which is cheap if you take the view that Canadian trade with the Pacific Rim and America will rebound over the next few years.
More from Tony Luckett:
> Tony owns shares in Berkshire Hathaway and Canadian Pacific.
