Canadian Pacific Railway Limited (USA) (CP): Bill Ackman’s Biggest Problem Might Not be J.C. Penney Company, Inc. (JCP) or Herbalife Ltd. (HLF)

Canadian Pacific’s exposure to the potash market

Canadian Pacific Railway Limited (USA) (NYSE:CP) obviously isn’t a direct play on the potash market like Mosaic and Potash, but it is exposed.

The company remains the dominant railroad used by Canada’s cartel, and potash remains a growth area. In July, the railroad signed an agreement with Germany’s K+S Potash Canada to provide shipping from its potash mine in Saskatchewan.

In 2012, fertilizer and sulfur shipments (of which potash is a major component) accounted for roughly 9% of Canadian Pacific Railway Limited (USA) (NYSE:CP)’s freight revenue.

That’s not overwhelming, but is definitely significant. Weakness in the potash market certainly won’t benefit Canadian Pacific Railway Limited (USA) (NYSE:CP).

Yet, doubting Canadian Pacific is not wholly about potash; back in June, RBC Capital downgraded the railroad to Underperform, arguing that the stock was overvalued. It reiterated this rating last month.

At these levels, Canadian Pacific is far from a value stock. It’s currently trading with a price-to-earnings ratio near 30, significantly greater than the broader S&P 500’s 18.6 and the Dow Jones Transports’ 21.3.

Investing in Canadian Pacific

While J.C. Penney Company, Inc. (NYSE:JCP) and Herbalife Ltd. (NYSE:HLF) continue to grab the headlines, Canadian Pacific could be the bigger story for Bill Ackman’s fund.

As the Canadian potash companies, including Mosaic and Potash, remain large customers of Canadian Pacific, weakness in the potash market could weigh on shares.

Of course, if Potash’s CEO is right — that the story has been overblown, and the sell-off has been overdone — all three companies could be great investments at these levels.

But it’s definitely a story investors in the sector need to watch going forward.

The article Bill Ackman’s Biggest Problem Might Not be J.C. Penney or Herbalife originally appeared on Fool.com and is written by Sam Mattera.

Sam Mattera has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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