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Canadian Pacific Railway Limited (CP - Analyst Report), Canada’s second largest railway carrier, reported adjusted earnings per share of C$1.91 (approximately $1.82) in the fourth quarter of 2013, missing the Zacks Consensus Estimate of $1.84. The results improved 49% from C$1.28 per share (approximately $1.29) earned in the year-ago quarter.

Quarterly revenues climbed 7% year over year to C$1,607 million (approximately $1,532 million), surpassing the Zacks Consensus Estimate of $1,521 million. The demand for rail service remained healthy across most of the business segments resulting in year-over-year growth.

For 2013, the company reported earnings per share of C$6.42 ($6.24), up 48% year over year. Revenues were C$6,133 million ($5,956 million), up 8% year over year.

In the fourth quarter, Carloads (volume) increased 6% year over year and revenue ton-miles (RTMs), which measure the relative weight and distance of rail freight transported by Canadian Pacific, grew 5% year over year. For 2013, Carloads and RTM grew 1% and 7%, respectively.

Adjusted Operating income improved 45% year over year to C$547 million (approximately $522 million). Adjusted operating expenses decreased 6% year over year to C$1,060 (approximately $1,010 million). Adjusted Operating ratio (defined as operating expenses as a percentage of revenues) improved 890 basis points year over year to 65.9% on continued focus on maintaining asset efficiencies, safety measures and productivity increase.

For 2013, operating income increased 41% year over year to C$1.8 billion (approximately $1.7 billion). Adjusted operating ratio improved 710 basis points year over year to 69.9%, representing an all time record. Adjusted operating expenses were C$4.3 billion (approximately $4.2 billion), down 2% year over year.

Liquidity

Canadian Pacific exited the fourth quarter with cash and cash equivalents of C$476 million (approximately $462 million), up from C$333 million (approximately $336 million) at the end of 2012. Long-term debt increased to C$4.687 billion (approximately $4.552 billion) from C$4.636 billion (approximately $4.681 billion) at year-end 2012.

Guidance

For 2014, the company expects revenue growth of 6%-7%. Operating ratio is expected to be 65% or lower. Further the company estimates earnings per share to be 30 Canadian cents or higher in comparison to 2013 adjusted earnings.

In addition, the company expects capital expenditure of $1.2 billion to 1.3 billion in 2014 and defined benefit pension income of approximately $50 million in 2014 and 2015. Going forward, the company assumes fuel price to be at US$3.50 per U.S. Gallon, tax rate to be 28% and CAD/USD exchange rate of C$1.05.

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 Ltd (TCK - Snapshot Report) and draw synergies from its agreements with Canpotex and Canadian Tire. Further, focus on volume expansion, operational efficiency, pricing revision and network capability upgrade bode well for the company.

However, a weak coal business, commodity risks related to purchase of diesel fuel and competition from other Canadian and U.S. companies like Canadian National Railway Co. (CNI - Analyst Report) and Union Pacific Corp. (UNP - Analyst Report) act as headwinds.

Currently, Canadian Pacific has a Zacks Rank #3 (Hold).

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