Canadian Pacific Reports In Line

Canadian Pacific Railway Limited’s (CP - Analyst Report) adjusted earnings per share of 19 cents per share in the first quarter of 2011 was in line with the Zacks Consensus Estimate. However, adjusted earnings of the second largest Canadian railway plunged 66.7% from the year-ago quarter.

Earnings were adversely affected by severe weather conditions, which resulted in reduced shipments and higher cost.

Revenues declined 0.3% year over year to C$1.16 billion ($1.17 billion) and were below the Zacks Consensus Estimate of $1.2 billion. There were multiple winter events that disrupted train operations of the company, resulting in slower train speed. This, in turn, resulted in reduced productivity and network capacity.

Carloads (volumes) dropped 3.1% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian Pacific, fell 1.7% from the year-ago quarter. Coal and Grain showed a major decline in volumes followed by Intermodal.

Operating income declined 47.1% year over year to C$109.2 million ($110.7 million). Operating expenses climbed 9.8% year over year primarily attributable to a rise in fuel expenses (up 24.2% year over year). Operating ratio (defined as operating expenses as a percentage of revenue) deteriorated 830 bps to 90.6% from 82.3% in the year-ago quarter.

Liquidity

Canadian Pacific exited the first quarter with cash and cash equivalents of C$310.5 million, which was much lower than C$723.8 million in the year-ago quarter. Long-term debt decreased to C$3.9 billion from C$4 billion at the end of 2010.

Our Analysis

We see Canadian Pacific, which competes with Canadian National Railway (CNI - Analyst Report), as benefiting from strong volume growth and continued operating gains going forward. 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. Further, Canadian Pacific remains on track to produce an operating ratio in the low 70s over the next two-to-four years.

However, we remain on the sidelines due to rising fuel prices, competitive threats, a strong Canadian dollar, highly unionized workforce and regulatory pressures.

Thus, we are currently maintaining our long-term Neutral recommendation 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