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Why Is Canadian Pacific (CP) Up 4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Canadian Pacific (CP - Free Report) . Shares have added about 4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Canadian Pacific due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Canadian Pacific Q3 Earnings Beat, Revenues Miss

Canadian Pacific's third-quarter 2019 earnings (excluding 11 cents from non-recurring items) of $3.48 per share (C$4.61) surpassed the Zacks Consensus Estimate of $3.41. Quarterly earnings also increased year over year. The bottom line was aided by the company’s prudent cost management, courtesy of the precision scheduled railroading model.

Although quarterly revenues of $1,495.5 million (C$1,979 million) increased year over year, the same fell short of the Zacks Consensus Estimate of $1,504.5 million. Rise in freight revenues led to the year-over-year top-line improvement.

Freight revenues rose 4.2% year over year and contributed 97.6% to the top line. Notably, the company’s freight segment consists of Grain (up 6.5%), Coal (up 7%), Potash (down 10%), Fertilizers and sulfur (up 20%), Forest products (up 2.6%), Energy, chemicals and plastics (up 12.7%), Metals, minerals and consumer products (down 3.4%), Automotive (up 2.4%) and Intermodal (up nearly 1%). In the reported quarter, total freight revenues per revenue ton-miles (RTMs) were up 6% year over year. Also, total freight revenues per carload climbed 3% from the year-ago reported figure.

Operating income increased 10% in the quarter under review. Operating expenses inched up marginally year over year. Operating ratio (operating expenses as a percentage of revenues on an adjusted basis) improved to 56.1% from 58.3% in the prior-year quarter, driven by this railroad operator’s efforts to control costs. Notably, lower the value of this key metric bodes well. Capital spending at the end of the first nine months of 2019 was C$1.15 billion.

Liquidity

The company exited the third quarter with cash and cash equivalents of C$145 million compared with C$61 million at the end of 2018. Long-term debt amounted to C$8,308 million compared with C$8,190 million in December 2018.

Outlook

Amid macroeconomic headwinds and geopolitical tensions, Canadian Pacific sees weak volumes in the fourth quarter.

For 2019, the company expects revenue ton mile (RTM) to increase in low-single digits. Moreover, adjusted earnings per share are projected to rise in double digits year over year compared with C$14.51 per share reported in 2018. Capital expenditures are still estimated around C$1.6 billion for the current year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Canadian Pacific has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Canadian Pacific has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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