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Canadian Pacific Tops on Earnings

UNP CNI CP

Trades from $3

Canadian Pacific Railway Limited (CP - Free Report) , Canada’s second largest railway carrier, reported adjusted earnings per share of C$1.88 (approximately $1.82) in the third quarter of 2013, beating the Zacks Consensus Estimate of $1.68. The results improved 45% from C$1.30 per share (approximately $1.31) in the year-ago quarter. Shareholders reacted positively to the news as the stock gained 9.19% in Wednesday trade on Nasdaq.

Quarterly revenues climbed 5.7% year over year to C$1,534 million (approximately $1,476 billion) but fell short of the Zacks Consensus Estimate of $1,499. The demand for rail service remained healthy across most of the business segments resulting in year-over-year growth.

Carloads (volume) decreased 2% year over year, while revenue ton-miles (RTMs), which measure the relative weight and distance of rail freight transported by Canadian Pacific, grew 2% year over year.

Operating income improved 39.4% year over year to C$524 million (approximately $504.2 million). Operating expenses increased 6% year over year to C$1,010 million (approximately $972 million). Operating ratio (defined as operating expenses as a percentage of revenues) improved 820 basis points year over year to 65.8% on continued focus on maintaining asset efficiencies, safety measures and productivity increase.

Liquidity

Canadian Pacific exited the third quarter with cash and cash equivalents of C$329 million (approximately $316.6 million), down from C$333 million (approximately $336 million) at the end of 2012. Long-term debt decreased to C$4.591 billion (approximately $4.418 billion) from C$4.636 billion (approximately $4.681 billion) at year-end 2012.

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 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 are headwinds to the company’s performance.

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


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