Canadian Pacific Expects Lower 1Q

Canada’s second biggest railway Canadian Pacific Railway Limited (CP - Analyst Report) expects a slow recovery in fuel and severe weather disruptions to dampen its first quarter 2011 earnings by 40 cents from the year-ago quarter.

There were several severe winter events that disrupted train operations of the company, resulting in slower train speed. This, in turn, reduced productivity and network capacity.

For the first quarter, Canadian Pacific expects earnings in the range of 12 cents to 22 cents per share. The mid-point (17 cents) is way below the Zacks Consensus Estimate of 77 cents. However, this represents a significant 30.91% growth year over year.

Canadian Pacific had average positive surprises of 8.20% in the last four quarters. The company’s fourth quarter 2010 earnings per share surpassed the Zacks Consensus Estimate by 2 cents and were well above the year-earlier earnings. Strong results were driven by double-digit revenue growth and an improved operating ratio. Revenue climbed 13% year over year and operating ratio (defined as operating expenses as a percentage of revenue) improved 360 bps to 77%.

We see Canadian Pacific, which competes with Canadian National Railway (CNI - Analyst Report), as benefiting from strong volume growth and continued operating gains. High demand for each product group, long-term investments, and rising coal volumes resulting from an agreement with Teck Resources Limited (TCK - Snapshot Report) will lead to higher profitability in future. Canadian Pacific remains on track to produce an operating ratio in the low 70s over the next three-to-five years.

This low operating ratio can be achieved through structural cost reductions, running longer and heavier trains equipped with distributed power, greater asset utilization as well as consolidating divisions, yards and shops. However, rising fuel prices, competitive threats, strong Canadian dollar and a highly unionized workforce limit the upside to the stock.

We are currently maintaining our long-term Neutral recommendation on Canadian Pacific supported by the Zacks # 3 (Hold) Rank.

Read the full analyst report on CNI

Read the full analyst report on TCK

Read the full analyst report on CP