Canadian Pacific Kansas City Ltd. (CP.TO, CP) could be a useful hedge for investors if US regulators reject the merger between Union Pacific Corp. (UNP) and Norfolk Southern Corp. (NSC), CIBC Capital Markets said.

"As investors seek opportunities to play the US transcontinental rail merger theme, CPKC has been a source of funds, contributing to its share price underperformance relative to its Class 1 peers since mid-May," CIBC analyst Kevin Chiang said in a note to clients.

Chiang said there is growing investor confidence that the US Surface Transportation Board (STB) will approve the transcontinental rail merger, but it will be the first time the regulator evaluates a major transaction under new merger rules, "so we are in uncharted territory."

"We believe CPKC shares could benefit from positive fund flows if the STB were to rule against the UNP/NSC merger," the analyst said.

"We argue that, in addition to CPKC's strong fundamental growth outlook, it offers a 'cheap hedge' for investors should the STB not allow this transcontinental combination," Chiang said.

The analyst maintained an Outperformer rating and $123 price target on CP.

(MT Newswires covers equity, commodity and economic research from major banks and research firms in North America, Asia and Europe. Research providers may contact us here: https://www.mtnewswires.com/contact-us)