Monday, 13 December 2010

All aboard! Union Pacific vs Canadian Pacific

A firm that runs a dedicated "Wine Train" for tourists; counts a major Napa Valley winemaker amongst its customers; has improving end markets; and is recording historically impressive internal financial ratios makes it hard for the wine-drinking arbitrageur to set it as the short half of a position without a heavy heart. But that is what's happening here with Union Pacific.

UNP is perhaps even amogst those railroads who help ship grapes to Canada for use with the incomprehensible (in both 'why?' and 'what exactly is it?' terms) "Cellared in Canada" policy. I have not bothered to attempt modelling the (negligible except in terms of national pride) impact of this on Canadian Pacific who are far smaller than UNP and more reliant on commodity volumes (particularly grain, lumber and its derivatives). Those volumes have looked iffy; and the company was cautious on its outlook at the last results. Moreover its internal ratios largely pale next to UNP's; and it has lost some business due to customer service issues.

However, such transports are ultimately a call on the rising (or falling tide) of macro growth. The valuation gap between the two should close.

Short UNP @$92.63, Long CP @$CAD64.78.


4 sips:

Charles Butler said...

re 'cellared in Canada'

What it means is that, prior to NAFTA, bulk CA wine was smuggled into Canada via a complex series of oak beamed tunnels near Bellingham, WA. In the other direction went 'shrooms and hydroponic pot.

DBS said...

Lol - proponents claim this allows the Canadian wine industry(which I understand to be ah, just about two or so distrubting firms) to 'compete' in the <$10/bottle mkt.

Funny way to create a value added product; and pretty sure it does no good to independents trying to create high quality liquid.

Hope all well!

-DBS

Charles Butler said...

It's probably reds their importing. If that's the case, no harm is done to anyone - least of all the public.

Fine thank you. Yourself?

DBS said...

It could all be less stressful but can't really moan. Holidays mean family; and family means stress (as well as some joy etc etc).

Yours ever,

-Scrouge.

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