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Will High Costs Hamper Canadian Pacific's (CP) Q2 Earnings?

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Canadian Pacific Railway Limited (CP - Free Report) is scheduled to report second-quarter 2018 results on Jul 18 after market close.

Last reported quarter, the company came up with a negative earnings surprise of 1.4% on lower-than-expected earnings and revenues. Results were hurt by rough weather conditions. However, the top and the bottom line improved from the year-ago figures.

Things do not look up for the company this to-be-reported quarter too.

Factors at Play

Similar to the previous quarter, revenues at the Grain, Forest products and Automotive segments might decline in the second quarter as well. Soft revenues are likely to affect the top line and overall results.

The company’s high operating expenses also raise concerns and are anticipated to hurt the operating ratio, limiting bottom-line growth.

Further adding to the woes are the company’s high-debt levels. Its debt-to-equity (expressed as a percentage) ratio is currently more than 100. The figure compares unfavorably with the industry’s 71.1% average and the S&P 500 index’s tally of 81.4%.

Due to the headwinds, shares of the company have underperformed its industry in the Apr-June period, gaining only 3.7% compared with the industry’s 8.3% rise.


 

However, the company’s measures to reward shareholders through dividends and share buybacks are impressive. This May, it raised its quarterly dividend per share by 15.5% to C$0.65 per share. The company is also active on the repurchase front.

Earnings Whispers

Our proven model does not conclusively show that Canadian Pacific is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as elaborated below.

Zacks ESP: Canadian Pacific has an Earnings ESP of -0.59% as the Most Accurate estimate is pegged at $2.44 per share, marginally lower than the Zacks Consensus Estimate of $2.45. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Canadian Pacific carries a Zacks Rank #4 (Sell).

We caution against all Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.


Stocks to Consider

Investors interested in the broader Transportation sector may check out some stocks worth considering, namely United Parcel Service, Inc. (UPS - Free Report) , Union Pacific Corporation (UNP - Free Report) and J.B. Hunt Transport Services, Inc. (JBHT - Free Report) as these stocks possess the right combination of elements to come up with an earnings beat in their next releases.

UPS has an Earnings ESP of +1.34% and a Zacks Rank #3. The company will report second-quarter earnings on Jul 25.

Union Pacific has an Earnings ESP of +1.15% and a Zacks Rank of 3. The company is scheduled to release second-quarter financial figures on Jul 19.

J.B. Hunt has an Earnings ESP of +2.13% and a Zacks Rank #2. The company will announce second-quarter earnings numbers on Jul 16. You can see the complete list of today’s Zacks #1 Rank stocks here.

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