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Canadian Pacific Railway Limited (CP - Analyst Report), Canada’s second largest railway, reported adjusted earnings per share of C$1.43 (approximately $1.39) in the second quarter, missing the Zacks Consensus Estimate of $1.45. Adjusted earnings improved a staggering 138% from 60 Canadian cents per share (approximately 59 cents) in the year-ago quarter.

Quarterly revenues climbed 10% year over year to C$1,497 million (approximately $1,463 billion) but fell short of the Zacks Consensus Estimate of $1,476. The demand for rail service remained healthy across most of the business segments resulting in year-over-year growth.

Carloads (volume) increased 3% year over year, while revenue ton-miles (RTMs), which measure the relative weight and distance of rail freight transported by Canadian Pacific, grew 11% year over year.  

Operating income improved 76% year over year to C$420 million (approximately $410.1 million). Operating expenses increased 4% year over year to C$1,077 million (approximately $1,053 million). Operating ratio (defined as operating expenses as a percentage of revenue) improved 1,060 basis points year over year to 71.9% on continued focus on maintaining asset efficiencies, safety measures and productivity increase.

Liquidity

Canadian Pacific exited the second quarter with cash and cash equivalents of C$442 million (approximately $432 million), up from C$82 million (approximately $81 million) in the year-ago quarter. Long-term debt increased to C$4.677 billion (approximately $4.849 billion) from C$4.636 billion (approximately $4.591 billion) in the year-end 2012.

Guidance

For 2013, the company expects revenue growth in the high-single digit range. Operating ratio is expected in the low 70s and earnings per share growth is expected to be over 40% compared to th year-ago level.

Our Analysis

We expect Canadian Pacific to deliver strong earnings growth aided by improved volume and pricing. The company is expected to benefit from its coal agreement with Teck Resources Limited (TCK - Snapshot Report) and draw synergies from its agreements with Canpotexand Canadian Tire. Further, major commodities will also garner favorable results for the company. Additionally, Canadian Pacific’s improving balance sheet position and regular returns to shareholders in the form of dividends make it attractive for investors.

Canadian Pacific operates with the likes of Canadian National Railway Company (CNI - Analyst Report) and Union Pacific Corporation (UNP - Analyst Report) and has a Zacks Rank #3 (Hold).

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