Canadian Pacific Railway Limited (NYSE/TSX: CP)

Off the Tracks After Ackman

April 2, 2013

1 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

CP: Off the Tracks After Ackman

Infitialis Introduction Investors in industries deemed popular or in vogue by the general public have a propensity to

engage in folly often resulting in the manifestation of valuation bubbles for the pioneering

companies. As the great Charles Mackay wrote in 1841: "Men, it has been well said, think in

herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and

one by one." Nearly two hundred years later, these words are still relevant as even nowadays

men find it difficult to act against the herd while the herd goes mad.

Infitialis is a research collective that exposes fraud and folly in an effort to identify bubbles

before they implode. Our track record of success speaks for itself. In this report, we will be

exposing folly on the scale of our prior report on Mellanox Technologies, Ltd. (NASDAQ:MLNX)

in September 2012 when the firm‟s shares were trading at a shocking $119/share.

Infitialis Track Record of Exposing Fraud and Folly is Unmatched

Symbol Market Publication Price on Date Subsequent Low

% Decline

QWTR OTCBB 08/08/12 $1.54 $0.06 -96%

CHMR Halted by SEC 08/13/12 $1.83 $0.01 -99%

NVMN OTCBB 08/13/12 $1.36 $0.03 -98%

MLNX NASDAQ 09/04/12 $119.00 $39.71 -67%

CLSR OTCBB 09/24/12 $6.06 $2.20 -64%

ZERO OTCBB 09/25/12 $1.89 $0.48 -75%

PRTN OTCBB 09/26/12 $0.47 $0.001 -99%

PWEI Pink Sheet 10/16/12 $0.69 $0.13 -81%

BNNY NASDAQ 11/09/12 $41.00 $32.06 -22%

OSGIQ Pink Sheet 11/26/12 $0.91 $0.63 -31%

CYBX NASDAQ 01/23/13 $47.10 $42.31 -10%

MJNA OTCBB 02/15/13 $0.44 $0.19 -57%

2 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Canadian Pacific Introduction Like Bill Ackman‟s legendary bicycle ride on the Montauk Highway last summer, the Canadian

Pacific Railway Limited (the “Canadian Pacific” or the “Company”)(NYSE/TSX: CP) share price

has recently spurted ahead of its comparables in an unsustainable fashion as it has more than

doubled to $126.96/share from $60.62/share before Ackman started his activist campaign less

than 18 months again. While Canadian Pacific‟s recent share price performance is impressive,

investors may soon be yelping in pain like Mr. Ackman when his Montauk bike-ride pace faded

and debilitating leg-cramps set in.

Like its peer Canadian National Railway Company (NYSE: CNI)(TSX: CNR), Canadian Pacific

is a Class 1, transcontinental mainline railway. A core tenet of the mainline rail business is

funneling as much rail traffic from

feeders and connectors as

possible onto a high-density

mainline railway network. Thus,

the two main divers of railway

profitability/cash-flow are carload

volumes and cost controls, both of which are intended to be maximized through the economies

of scale in the mainline business model. In addition, the railroading business in general has

high sustaining capital intensity, as both the physical track and the rolling stock (locomotives

and rail cars) require frequent maintenance and replacement to sustain efficient and safe

operations.

Canadian Pacific‟s potential economies-of-scale are significantly limited relative to its peers

because the Company operates a significantly smaller network of only 14,400 miles of track

through predominately rural areas with approximately 55% of the geographic footprint in

Canada and the remainder in the United States. For comparison, Canadian National Railway

3 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

operates the largest rail network and the only transcontinental network in North America with

over 20,600 route miles of track. Moreover, from an operational perspective, Canadian Pacific

is less competitive than its peers as it has a higher average track grades because of its

Canadian Rockies crossings (estimated 2-3%) which significantly increases its fuel costs (with

limited pass-through ability to customers), has less United States connectivity, is more northerly,

and has a higher mileage concentration in Western Canada (~40% of volumes). The latter two

factors drive increased winter network outages due to snow, flooding, and landslides.

Moreover, the steeper average track grades and mountainous geographic footprint increases

the capital intensity of the business relative to its peers and makes it more difficult for even the

most talented management teams to effect operational improvements, such as average train

velocities and locomotive dwell times.

Recently, Canadian Pacific was subject to a proxy battle (publicly launched 10/28/11 when

shares were trading at $60.62/share) which was initiated by Mr. William Ackman of Pershing

Square Capital Management, L.P. of New York (“Pershing Square”). Pershing Square believed

Canadian Pacific was ineffectively operating the railway and successfully removed the prior C-

suite management team as well as several sympathetic board members. Pershing Square then

was able to select Mr. E. Hunter Harrison as the new Chairman of the Board and CEO for

Canadian Pacific on 06/28/12. Mr. E. Hunter Harrison is best known for his prior leadership of

the Canadian National Railway Company and Illinois Central Railroad Company, but his recent

track-record is of more concern with the $4bn bankruptcy of Dynegy Inc. and the independent

finding of a “fraudulent conveyance” of certain of the firm‟s key assets while he served as

Chairman and CEO. Pershing Square owns 24.2mm shares of CP, approximately 13.9% as of

12/31/12, for a current market value of ~$3.1bn, or >30% of Pershing Square‟s total AUM.

Interestingly, Mr. William Ackman‟s subsequent activist campaign on Herbalife (NYSE: HLF),

which utilized the same techniques as his CP battle including a massive conference

4 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

presentation and extensive media engagement, almost immediately blew-up in his face as the

market quickly poked significant holes in his thesis and took a countervailing position, driving

the share price above the level before Pershing Square‟s presentation. While this dynamic may

take longer to play out for the CP situation, it seems the market could quickly revert once these

and other flaws are exposed in the Pershing Square investment rational for the Company.

Canadian Pacific Summary Valuation Metrics:

Interestingly, during the proxy contest, one of the purported failures highlighted by Pershing

Square of the prior management team of Canadian Pacific was its 10/30/08 acquisition of the

Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”) for ~$1.8bn at an 18.0X LTM

EBIT multiple. Astute investors would note that because of the recent run-up in Canadian

Pacific‟s share price, the Company is currently valued at a shocking three full turns higher at

21.1x LTM EBIT.

Investment Thesis – SHORT Canadian Pacific Because of the recent and unsuitable run-up in equity valuation, Canadian Pacific is a

compelling short opportunity because of 1) an irrational market assumption regarding the timing

and feasibility of the railroad operational improvement plan, 2) sub-optimal corporate

governance oversight, and 3) impending Pershing Square liquidation of CP common stock

following the implosion of their recent J.C. Penney Company, Inc.(NYSE:JCP) investment and

Capitalization Valuation Multiples

$mm, excl. share price 4/1/2013 $mm; Consensus Est (2) Figure Multiple CNI Comp

Current Share Price $126.96 2012A EBITDA $1,806.0 14.8x 10.6x

Outstanding Shares (1) 173.9 2013E EBITDA 2,306.0 11.6x 9.8x

Dilutive Effect of Options (1) 2.1 2014E EBITDA 2,657.0 10.1x 9.1x

Market Capitalization $22,351.1

Less: Cash (333.0) 2012A Net Income $690.7 32.4x 15.9x

Add: Debt 4,690.0 2013E Net Income $1,077.0 20.8x 16.3x

Enterprise Value $26,708.1 2014E Net Income $1,325.0 16.9x 14.8x

Sources

(1) CP 12/31/12 40-F (2) Bloomberg

5 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

limited partner redemptions following their bolloxing of the Herbalife situation coupled with a

purported SEC investigation into Pershing Square‟s trading activity.

The current irrational market behavior appears to exist because many investors have been

blindly riding the coat-tails of Pershing Square‟s pre-2012 success on such names as MBIA

Inc.(NYSE:MBI) and General Growth Properties Inc. (NYSE:GGP); which conveniently

overlooks Ackman‟s prior implosion of Gotham Partners and failed activist investments in

Borders and Target. These primarily Canadian-based individuals, funds and sell-side analysts

are largely playing a momentum trade, not a fundamental investment, in CP shares. Further, in

their blind following of Bill Ackman, it seems that they are quick to forget that Pershing Square‟s

position has been completely illiquid to date, due to the size of the position and reputation risks

of selling shortly after installing their own management team. Finally, the risk of a merger take-

out, long rumored, seems extremely diminished at this point in time because of the exceedingly

rich valuation of CP relative to is peers and anti-trust regulatory concerns Canada and the

United States.

Canadian Pacific Turn-Around Plan is Fatally Flawed CP shares are currently pricing in full achievement, with no room for shortfalls or delays, of an

aggressive turn-around plan. This plan contemplates both achieving an Operating Ratio (“OR”)

of ~65% by 2016 and generating a revenue CAGR of over 6% from 2012-2016. The lowest

annual OR that CP has achieved in the last 20 years was 75.3%, approximately 1,000bps

above the OR that the stock is currently discounting and also the most recent 4q12 performance

by Mr. E. Hunter Harrison. Moreover, CP was on the only Class 1 railroad to have significantly

lower train velocity on their network, YoY, in January 2013. CP is clearly trading as a “story”

instead of an investment based on the underlying operational performance of the business at

this time.

6 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

North America Railroad Operating Ratio Trends

Of particular note, the market seems to believe CP can transition from a bottom decile OR

performer to a market-leading firm in less than four years. Moreover, CP Management and sell-

side estimates earnings estimates are paired with exceedingly aggressive CAPEX intensity

targets, as forecasted CAPEX spend is to be below both CP and CNI precedents. Simply put,

in railroading, it is difficult to increase operational efficiency without sustained investment in new

equipment and technology to both capture incremental efficiency improvements in new

technologies and avoid equipment malfunctions and delays associated with service outages and

delays.

Blood on the Tracks – Oil-on-Rails Future Potential is Over-Played In addition to a dramatic operational improvement, CP bulls have priced-in significant revenue

growth from crude oil-on-rails transport as oil/gas producers choose to ship liquids from Alberta

and North Dakota via rail versus being subject to heavy negative pricing differentials on the

constrained existing pipeline capacity. Mr. E. Hunter Harrison, CP‟s Chairman and CEO, has

done little to temper investors‟ expectations, declaring on the 10/24/12 investors call, „If you put

it [oil-on-rails projects] all together, it‟ll make people forget the Gold Rush in 1849.” CP has

attempted to capitalize on the boom in crude transport, forecasting its ~$90mm in CAPEX will

allow it to transport nearly 70,000 carloads a year by 2014, up from the only approximately 500

carloads in 2009.

7 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Because of some current pipeline

capacity constraints in moving

liquids out of Alberta and North

Dakota, the crude oil pricing

differential to PADD III (Gulf

Coast) has been ~$30/barrel,

making rail-transport a price-competitive alternative at this time. However, as the Keystone XL,

Northern Gateway, and TransMountain pipeline expansion projects move closer to fruition,

astute investors should remember that, on a mile-for-mile basis, pipeline transport of crude is

roughly half the cost of transport via rail and is significantly safer with lower probability of

catastrophic spills or leaks. Moreover, the pricing dislocation between crude and natural gas

has significantly crimped demand for coal, further limiting CP‟s potential for consolidated volume

and revenue growth.

Just last week on 03/27/13, CP demonstrated the significant dangers of shipping crude oil via

rail when 14 cars on its 94-car train heading for the Chicago area crashed off the CP tracks

approximately 150 miles northwest of Minneapolis near the town of Parkers Prairie. The

derailed crude tanks released a gusher of more than 30,000 gallons of untreated crude oil onto

the prairie, shutting the rail line for an estimated 2-3 days, and requiring a massive remediation

effort to clean up the literal river of crude oil. Luckily, the derailing happened in a relatively rural

area and the spilled crude did not combust, but this is a poignant example of the potential risks

of shipping highly volatile cargos on relatively old tracks. Moreover, it reiterates the importance

of the continuous CAPEX investment required to ensure tracks and trains remain in safe and

efficient operating condition.

8 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

CP March 27, 2013 Railcar Derailment in Minnesota – >30,000 Gallons of Crude Spilled

As an analogy to the current oil-on-rails mania, investors would be well-served to review CP‟s

disastrous 10/30/08 acquisition of the Dakota, Minnesota & Eastern Railroad Corporation

(“DM&E”) for ~$1.8bn at an 18.0X LTM EBIT multiple. At the time of the acquisition, bullish

investors were excited about CP‟s possibly to start hauling Powder River Basin (“PRB”) coal

and capture a portion of the rich “dark-spread” pricing differential between natural gas and coal

commodities at the time. Moreover, DM&E‟s 70% OR at the time of acquisition was supposed

to be accretive to CP‟s operating statistics. However, CP paid this significant premium to

become the 3rd rail provider in the PRC basin, a relatively weak strategic position in freight

negotiations with potential customers. In 4q12, CP announced it was indefinitely deferring plans

complete the expansion of its rail network within the PRB region and was forced to take a

$180mm impairment on construction and land option expenses.

9 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Pershing Square Activist Campaign Deck – February 2012

Like the CP‟s strategic position in the PRB for coal, CP is also competing with BNSF and CNI

for oil on rail shipments, both of whom arguably have better and faster network connections with

the Bakken field and PADD II/III refineries. With CP currently trading at 21.1x LTM EBIT,

investors should consider purchasing the Company at the current market valuation is a replay

similar to the DM&E acquisition disaster.

10 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Post-Pershing: An improvement in governance? After all the drama involving Pershing Square‟s proxy rebellion, investors seem to be blindly

assuming that that new slate of management and Board of Directors will result in a dramatic

increase in operational efficiency and shareholder returns. However, a closer review of their

respective biographies raises some significant governance concerns.

E. Hunter Harrison – Chairman of the Board and Chief Executive Officer

Mr. E. Hunter Harrison is best known for

his prior leadership of the Canadian

National Railway Company and Illinois

Central Railroad Company, but his recent

track-record is of more concern with the

$4bn bankruptcy of Dynegy Inc. and the independent finding of a “fraudulent conveyance” of

certain of the firm‟s key assets while he served as Chairman and CEO. Also, it is difficult to

understand how Mr. E. Hunter Harrison can serve as a “hands-on” manager as he still resides in

Wellington, Florida, approximately 5,000km from CP‟s corporate headquarters in Calgary,

Alberta. Also, investors should compare the fact that Mr. E. Hunter Harrison purchased CP

stock at a significantly lower VWAP relative to the current market price as part of the proxy

battle should also be compared against his purchase of the similar amount of Dynegy stock,

which is now worth $0/share following the firm‟s bankruptcy.

Moreover, after the dramatic run-up in CP‟s share price, it seems prudent for investors to

remember Warren Buffett‟s (a now proven rail-road investor and executive, in addition to all his

other accomplishments) extremely prescient quote from 1989, “When a management team with

a reputation for brilliance tackles a business with a reputation for bad economics, it is generally

the reputation of the business that remains intact.”

11 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Richard C. Kelly – Board of Directors and Chairman of the Audit Committee, Finance

Mr. Kelly was President and Chief

Executive Officer of NRG Energy, Inc.

(“NRG”), a former subsidiary of Xcel

Energy Inc. from June 6, 2002 to May 14,

2003, and a director of NRG from June

2000 to May 14, 2003. In May 2003, NRG and certain of NRG‟s affiliates filed voluntary petitions

for reorganization under Chapter 11 of the U.S. Bankruptcy Code to restructure their debt,

wiping out equity holders.

The Hon. John P. Manley – Board of Directors, Audit and Finance Committee

Mr. Manley was a director of Nortel

Networks Corporation and Nortel

Networks Limited (collectively, the “Nortel

Companies”) when the Nortel Companies

applied for and were granted creditor

protection under the Companies‟ Creditors Arrangement Act on January 14, 2009, wiping out

equity holders. In addition, as a result of the announcement in May 2004 by Nortel Companies

of the need to restate certain of their previously reported financial results, the Ontario Securities

Commission made a final order on May 31, 2004 prohibiting all trading by directors, officers and

certain current and former employees including J.P. Manley.

William A. Ackman – Board of Directors, Corporate Governance and Finance Committee

William A. Ackman is the Founder and

Chief Executive Officer of Pershing

Square Capital Management, L.P.

Pershing Square Capital Management

had an economic exposure to more than 40% of the stock of Borders Group, Inc. (“Borders”) via

12 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

a combination of common shares and cash-settled total return swaps at the time of the

company‟s Chapter 11 of the U.S. Bankruptcy Code filing on 06/16/11, which wiped out all

equity holders as the firm was liquidated. It is estimated that Pershing Square investors lost in

excess of $200mm on its investment in Borders.

Paul C. Hilal – Board of Directors, Finance and Compensation Committee

Paul C. Hilal is a Partner at Pershing

Square Capital Management, L.P..

Pershing Square Capital Management

had an economic exposure to more than

40% of the stock of Borders Group, Inc. (“Borders”) via a combination of common shares and

cash-settled total return swaps at the time of the company‟s Chapter 11 of the U.S. Bankruptcy

Code filing on 06/16/11. It is estimated that Pershing Square investors lost in excess of

$200mm on its investment in Borders.

Rebecca MacDonald – Board of Directors, Finance and Compensation Committee

Rebecca MacDonald is the Founder and

Executive Chairman of Just Energy

Group Inc., an independent marketer of

deregulated gas and electricity, and

previously founded Energy Marketing,

Inc. Just Energy has hit the skids over

the last year, with its shares down 48.1% on an LTM basis and allegations of accounting fraud

circling.

13 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Pershing Square Will Become a Forced Seller After reviewing the current market dynamic, it appears an impending Pershing Square

liquidation of CP common stock is looming. First, Pershing Square‟s high-profile investment in

J.C. Penney Company, Inc.(NYSE:JCP) has imploded after the last year as Bill Ackman‟s hand-

picked CEO, Ron Johnson, alienated the Board of Directors and failed to halt a >30% in same

store sales. It is estimated that Pershing Square has lost >$200mm on their JCP investment.

Next, on 12/19/12, Bill Ackman launched a high-profile short-sale campaign against Herbalife

Inc. (NYSE: HLF). After Ackman publicly admitted to shorting over 20mm HLF shares, Third

Point and Icahn Associates took an opposing long position, driving share prices higher than the

price before the Pershing Square presentation in a “mother of all short-squeezes.” As the

Pershing Square limited partner begin to realize a significant portion of their net worth is now

tied to a single controversial stock, investor redemptions are posed to skyrocket. Investor

redemptions will require Pershing Square to liquidate its long positions, such as its largest

holding CP. Finally, based on the SEC FOIA response in Appendix 1, it appears the United

States Securities and Exchange Commission is now investigating Pershing Square and William

Ackman‟s trading regarding Herbalife. This will also likely cause LPs to reconsider their

association with Ackman and CP.

It is also important to review the differences in the background and perspective of the notable

self-made investor Carl Icahn, who grew his net worth inch by inch over decades with

investment acumen, as opposed to Bill Ackman, who primarily grew rich from management fees

on billions of others people money under management. Moreover, Ackman appears to have

taken an inordinate sizing risk as the trading volume of CP indicates that Pershing

Square's position is way too large for a dynamic capital fund should he face any

redemptions in the future.

14 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Precedent Transaction Multiples and Canadian Resource Protectionism

Limits Take-Over Risk

Below are ALL the significant railroad mergers in North America in the last 20 years with a

transaction value great than $1bn. Please note this is also the same comparable transactions

peer-set Evercore utilized in its fairness opinion for the BNSF acquisition by Berkshire

Hathaway.

Based on these precedent transaction multiples, it seems difficult to believe that even if the

United States and Canadian anti-trust regulators would approve further consolidation within the

industry, that a strategic acquirer could afford to pay more than 7-10x CP‟s LTM EBITDA, or

$47.63-$78.78/share. In addition, the Brookfield Asset Management and Caisse de dépôt et

placement du Québec buyout consortium that purported expressed a preliminary indication of

interest in CP back in 2007 would be unable stump up the >$30bn premium enterprise value

Acquirer Target Announce-ment

Transaction Value

LTM FV/Revenue

LTM FV/EBITDA

LTM FV/EBIT

Berkshire Hathaway BNSF 11/03/09 $35,767 3.0x 8.8x 12.5x

Canadian Pacific Railway Limited

DM&E 09/05/07 $1,500 NA NA 18.0x

BNSF (transaction blocked by US Surface Transportation Board)

Canadian National Railway Company

12/20/99 $13,209 2.9x 7.7x NM

Canadian National Railway Company

Illinois Central Corporation

02/10/98 $2,374 4.3x 9.7x 11.3x

CSX Corporation Consolidated Rail Corporation

04/08/97 $4,300 2.8x 9.8x 14.0x

Union Pacific Corporation

Chicago & North Western Transportation

03/10/95 $1,107 1.4x 5.2x 6.9x

BNSF Santa Fe Pacific Corporation

06/30/94 $3,397 1.4x 6.3x 10.1x

Minimum $1,107 1.4x 5.2x 6.9x

Mean $8,808 2.6x 7.9x 12.1x

Median $3,397 2.8x 8.2x 11.9x

Maximum $35,767 4.3x 9.7x 18.0x

15 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

check and limited capacity for additional leverage, which is more than double the enterprise

value of CP back in 2007 when rumors started to circulate within the marketplace.

Moreover, because of the recent displays of Canadian resource nationalism and protectionism,

it seems unlikely that Canadian anti-trust regulators would allow one of its two remaining Class

1 railroads be acquired by foreign firm or merged into another railroad. First, on 04/10/08, the

Canadian Government blocked the proposed $1.3bn sale of Canadian aerospace and

information technology firm MacDonald Dettwiler & Associates Ltd. to U.S. defense company

Alliant Techsystems Inc. on national security grounds under the Investment Canada Act, which

is rather ironic considering Canada has never been invaded! Under the Investment Canada

Act, rulings are made by the industry minister, a politician, and require only that the proposed

transaction show a “net benefit” to Canada, a largely subjective assessment. Second, on

11/02/10, Canadian Government again utilized the Investment Canada Act to block the

proposed $38.6bn purchase of Potash Corporation, a Saskatchewan fertilizer miner and

producer, by BHP Billiton, a large Australian mining company. Most recently, on 03/20/12,

Gencore International PLC was required to make several adverse deal structure concessions,

such as divesting assets which comprise a majority of the Canadian operations segments to

Agrium Inc. and Richardson International Ltd., to ensure regulatory approval for its $6.1bn

acquisition of Viterra Inc., a global grain and logistics business that was headquartered in

Saskatchewan. In addition, Canadian protectionism concerns have been raised in the Nexen

and Progress oil/gas transactions as foreign acquirers have pursed companies listed in Canada

(never mind the fact that a majority of the respective target companies‟ assets were outside

Canada).

Thus, based on these recent poignant examples of Canadian resource nationalism and

protectionism being utilized to derail merger agreements with compelling industrial logic, it

16 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

seems unlikely any rational railroad peer would attempt a take-over or merger run at Canadian

Pacific in light of its extremely rich valuation metrics and the adverse geopolitical environment.

Pair-Trade Possibility – Short CP / Long CNI

Because CP is up a shocking 51% over the last 6-months versus 11% for CNI and 67% versus

24% for the last 12 months, respectively, a pair-trade with a short CP leg and long CNI leg may

be attractive for those with a bullish macro perspective. In addition, because CP currently

trades at a significant valuation premium to CNI, it is likely this relative valuation dichotomy will

converge over time. Moreover, CNI should benefit from a more robust operating history and key

structural advantages of 1) larger network size, 2) higher US exposure, and 3) more efficient

track operations.

While a pair-trade introduces some basis and tracking risk to the investment thesis, it seems to

be an appropriate macro hedge in light of increased interest in infrastructure investing and

potential bulk commodity demand volatility.

17 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Conclusion Like our prior report on Mellanox Technologies, Ltd. (NASDAQ:MLNX) in September 2012 when

the firm‟s shares were trading at a shocking $119/share, Canadian Pacific Railway Limited

(NYSE/TSX: CP) is an overvalued company with limited potential upside. Below are the top five

reasons why long investors should consider selling their position in CP or why aggressive

traders should consider entering into a short-sale position:

1. After rallying over 67% over the last twelve months and outperforming all peers, CP

shares have entered unsustainable levels based on irrational market assumptions

regarding the timing and feasibility of the Company‟s operational improvement plan

2. Potential business growth for crude oil via rail transport has been overplayed and is

detrimental to more important coal transport

3. Sub-optimal corporate governance structure and the Board of Directors composition

raises serious concerns about prior risk tolerances, accounting issues, and bankruptcy

filings at such issuers as Dynegy, NRG, Nortel, Borders, and Just Energy.

4. After bolloxing their JCP and HLF trades and under investigation by the SEC, Pershing

Square may be required to begin selling down a significant portion their oversized CP

position, which has been completely illiquid to date, in order to meet investor

redemptions and reduce portfolio risk exposures

5. Pair-trade with Canadian National Railway Company (NYSE: CNI)(TSX: CNR) can be

utilized to reduce macro risk exposure

Disclaimer

The author of this report is short CP.

18 Infitialis Research Collective – Report on Canadian Pacific (NYSE/TSX: CP)

Appendix 1: SEC FOIA Response Indicates Ongoing Pershing Square Investigation