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Canadian Pacific Rides on Solid Freight Revenues, Costs High

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On Dec 4, we issued an updated research report on Canadian Pacific Railway Limited (CP - Free Report) . While upbeat freight revenues buoy optimism on the stock, issues like high operating expenses and escalated debt levels raise concerns.

Let’s discuss in details the factors influencing the company’s performance.

Canadian Pacific is gaining momentum on the back of upbeat freight scenario as bulk of its revenues is derived from this source. In the first nine months of 2018, freight revenues have increased 10.2% on a year-over-year basis. Strong freight revenues are expected to boost top-line growth in the final quarter of 2018 as well.

Additionally, the company's efforts to reward its shareholders through dividends and share buybacks are impressive. Over the last couple of years, Canadian Pacific has increased its annual dividend by over 20%. The latest divididend hike came in May 2018, when the company raised its quarterly dividend per share by 15.5% to C$0.65 per share. It is active on the buyback front as well.

In 2018, Canadian Pacific signed a number of agreements with various labor groups. The most recent development in this regard was the company’s tentative four-year agreement with the union representing its mechanical employees (unifor) in December 2018.

The ratification of the four-year agreement with the union representing its conductors and locomotive engineers earlier this year is an added positive. System Council No. 11 of the International Brotherhood of Electrical Workers also ratified a three-year agreement.

On the flip side, high operating expenses have been hurting Canadian Pacific for quite some time now. This trend is expected to continue and dent bottom-line growth in the final quarter of 2018. The company's high debt levels add to the woes.

A glimpse of this Zacks Rank #3 (Hold) company’s price performance reveals that it has underperformed the industry on a year-to-date basis. The stock has gained 9.3% compared with its industry’s 11% growth.

 

Stocks to Consider

Few better-ranked stocks in the Zacks Transportation sector are Hertz Global Holdings, Inc. (HTZ - Free Report) , Frontline Ltd. (FRO - Free Report) and Spirit Airlines, Inc. (SAVE - Free Report) . While Hertz Global carries a Zacks Rank #2 (Buy), Frontline and Spirit Airlines sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Hertz Global, Frontline and Spirit Airlines have gained 11.7%, 22.1% and 69.8%, respectively, in the past six months.

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