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One of the biggest railroads in Canada, Canadian Pacific Railway Limited (CP - Analyst Report) is facing labor strikes by railway workers given disagreements over a new labor contract. Approximately 5,000 union workers went on strike, thus significantly affecting freight services across Canadian Pacific’s rail networks.                                                                  

The strike has substantially halted operations at Canadian Pacific leaving fewer requirements of other workers. With freight not moving, the company has temporarily laid off 2,000 other workers. Management also indicated another round of furlough, which could affect 1,400 employees.

Meanwhile, Canadian regulators are expected to come up with back-to-work legislation by next week, forcing union workers to resume their duties if both parties fail to reach an agreement. Canadian Labor Minister, Lisa Raitt pointed out that apart from raising employment issues, a prolonged strike would create cost headwinds of approximately C$500 million (US$489 million) per week for the Canadian economy.

The strike was called by the union members of Teamsters Canada Rail Conference (TCRC), who were working without any effective contract after expiration of their agreement in December last year. Approximately 79% of Canadian Pacific’s employees are unionized. These employees are represented by around 39 bargaining units.

Canadian Pacific has existing contracts with 27 bargaining units, of which five are in Canada and 22 are in the U.S.  By the end of this year, the company expects four out of five contracts with Canadian union workers to expire. We believe that given a lack of clear visibility over employee issues, Canadian Pacific’s service capabilities would remain pressured, ultimately weighing over margin performance.

Apart from these labor related concerns, the company is also subject to competitive threats from peers like Canadian National Railway (CNI - Analyst Report). Moreover, exchange rate fluctuations, rising fuel prices and low utility coal shipments limit the upside potential of the stock.

We have a Neutral recommendation on Canadian Pacific. For the short term (1-3 months), the company has a Zacks #2 Rank (Buy).

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