Canadian Pacific Railway Limited ( CP Quick Quote CP - Free Report) have gained 8.5% in the past year, underperforming its industry’s 11.9% uptick in the same time frame. Image Source: Zacks Investment Research
Let’s look at the reasons behind this underperformance.
Canadian Pacific's decision to trim its volume growth outlook for 2021 is alarming. The outlook was trimmed due to the reduced expectations for Canadian grain in the 2021-2022 crop year, the prevalent supply-chain challenges and unfavorable weather conditions in British Columbia. Volumes, measured in revenue ton miles, are expected to be roughly flat in 2021 with the 2020 reported levels (previous expectation: low single-digit growth).
Management also slashed the earnings growth view for 2021. Canadian Pacific now anticipates adjusted earnings per share to increase in the high single-digits during 2021 from the 2020 adjusted diluted EPS of $3.53 (previous expectation: double-digit growth).
With Canadian Pacific investing significantly in its facilities’ upgrade, it is incurring significant amount of capital expenses. Capital expenditures increased 6.2% year over year to C$1.65 billion in 2019. It was roughly similar in 2020. Capital expenditures are projected to be C$1.55 billion in 2021. Such high capital expenditures amid adversities can massively affect the bottom line.
Canadian Pacific’s total operating expenses increased 8% to $3,581 year over year in the first nine months of 2021. This rise was mainly due to the 24% escalation in fuel costs in the first nine months of the year. With fuel costs flaring up as oil prices move north, operating expenses are likely to have been high in fourth-quarter 2021 too (Detailed results will be out on Jan 27). This, in turn, is likely to have hurt the bottom line.
Canadian Pacific’s liquidity position also does not bode well. CP exited the third quarter of 2021 with a current ratio (a measure of liquidity) of only 0.39. A liquidity ratio of less than 1 is not desirable as it implies that the company may have problems in meeting its short-term obligations.
Other Bearish Factors: The Zacks Consensus Estimate for 2022 earnings has been revised 4.1% downward over the past 60 days. Given the wealth of information at their disposal, brokers' advice and the direction of their estimate revisions should essentially benefit investors. This is because the same serves as an important parameter in ascertaining the stock price.
In addition, Canadian Pacific currently carries a Zacks Rank #5 (Strong Sell). Moreover, CP’s
Momentum Score of F further highlights its short-term unattractiveness.
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