TORONTO Shares of Canadian Pacific Railway (CP.N) (CP.TO) fell on Tuesday after activist investor Pershing Square Capital Management said it would sell nearly one-third of its roughly 14-percent stake in Canada's second biggest railroad and RBC Capital markets downgraded the stock.
Pershing Square's after-market announcement on Monday that it will sell up to 7 million shares will bring its stake below the 10 percent where sales require formal notification to Canadian regulators, RBC said.
Pershing may still be subject to reporting requirements in the United States, where CP shares are also listed, and as CP board members, Pershing chief Bill Ackman and his partner Paul Hilal, would also be subject to any insider sales disclosures.
The announcement of the stock sale came barely a year after Pershing and the well-known Ackman waged a successful proxy battle to overhaul the CP board.
RBC analyst Walter Spracklin downgraded CP's shares to "underperform" from "sector perform," and said the stock was currently priced at a level of earnings growth that exceeds CP's long-term financial targets.
RBC said CP shares were trading at 18.8 times 2014 earnings, or a 23-percent premium to rival Canadian National Railway Co (CNR.TO), which is at 15.3 times, and a 45-percent premium to the average trading multiple of 13 times for U.S. rail operators.
RBC has a price target of C$104.00.
"Going forward, we expect CP will see its investor base shift away from momentum-driven catalyst investors and more toward long-term holders," Spracklin said in a note to clients. "We believe these holders, however, will want to see more upside value in CP's shares than what exists today."
CP shares were trading at C$133.16 just after midday on the Toronto Stock Exchange after falling as much as 5.1 percent earlier. In New York, shares were at $128.63 after falling as much as 3.8 percent.
(Reporting by Euan Rocha and Solarina Ho; editing by G Crosse)