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Updated Research Report on Canadian Pacific Railway

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On Apr 4, 2014, we issued an updated research report on Canadian Pacific Railway Limited (CP - Free Report) . The company’s fourth-quarter earnings missed the Zacks Consensus Estimate but remained ahead of the year-ago level. Revenues for the fourth quarter surpassed our expectation and also increased year over year.

Currently the Zacks Consensus Estimate for first-quarter 2014 earnings is pegged at $1.44, representing year-over-year growth of 18.94%.

We remain encouraged by Canadian Pacific’s healthy performance backed by volume addition, safety and efficiency along with cost metrics. Additionally, pricing above inflationary levels (3–4% year-over-year growth) is expected to aid the company’s projected revenue growth of 6-7% in 2014.

Further, Canadian Pacific remains committed to generating an operating ratio in the low 70s and also targets an operating ratio of 65% in 2014, way ahead of its initial target of 2016. In the fourth quarter, the company remained close to achieving its target by delivering an operating ratio improvement of 890 basis points year over year to 65.9%.

To attain this target, the company focused on upgrading its network capabilities by consolidating and repairing facilities that will enable it to operate longer and heavier trains, achieve higher car velocity as well as deliver on-time performance.

The company is also building network for shipping frac sand, pipe and construction materials along with other goods required for oil and gas shale production to benefit from the current boom in the energy markets. To support these developments, the company expects a capital expenditure within C$1.2 billion and C$1.3 billion in 2014.

The company is also expected to gain around $210 million from sale proceeds of the west end of its Dakota, Minnesota & Eastern railroad line to Genesee & Wyoming Inc. The deal is expected to close in mid 2014 and is subject to the approval of the U.S. Surface Transportation Board.

However, the company’s freight volumes and revenues are largely dependent upon the performance of the North American and global economies, which remain on the slow recovery path. Adverse North American and global economic conditions may have a negative impact on the volume of rail shipments and revenues resulting in a downside risk for the company.

Moreover, the near-term growth for the company is expected to be tempered by lower coal production in the domestic market and lower international thermal prices. Lower natural gas prices resulting in weak thermal coal market have raised significant concerns limiting overall coal shipments, despite strong exports to Asian countries. Further, the company expects Intermodal revenues to be weak in 2014, given loss of Orient Overseas Container Line business to Canadian National Railway Company.

Also, Canadian Pacific faces significant competition for freight transportation in Canada and the U.S., including competition from other railways like Canadian National Railway Co. (CNI - Free Report) , Norfolk Southern Corp. (NSC - Free Report) and Kansas City Southern (KSU - Free Report) . We believe the cost structure and service of the rivals could increase competition and negatively impact the company’s operating results.

Canadian Pacific Railway currently has a Zacks Rank #3 (Hold).

Read the Full Research Report on KSU
Read the Full Research Report on CNI
Read the Full Research Report on NSC
Read the Full Research Report on CP

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