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Canadian Pacific Beats, Rev Up

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Canadian Pacific Railway Limited’s (CP - Free Report) adjusted earnings per share of C$1.30 (approximately $1.31) in the third quarter of 2012 surpassed the Zacks Consensus Estimate of C$1.26 ($1.27). Adjusted earnings per share also registered an 18% increase from C$1.10 ($1.12) earned in the year-ago quarter, driven by higher revenues across all product lines.

Revenues increased 8% year over year to C$1,451 million (approximately $1,457 million) but missed the Zacks Consensus Estimate of C$1,454 million ($1,460 million). The year-over-year increase was primarily aided by substantial revenue growth in Automotives (up 31%) as well as Industrial and Consumer Products (up 24%).

On a year-over-year basis, Carload (volumes) increased 3% and revenue ton miles, which measures the relative weight and distance of rail freight transported, also grew 3%.

Operating income increased 16% year over year to C$376 million (approximately $377 million). Operating expenses increased 6% year over year to C$1,075 million (approximately $1,079 million). This has resulted in an operating ratio (defined as operating expenses as a percentage of revenue) of 74.1%, up 170 basis points year over year.  


Canadian Pacific exited the quarter with cash and cash equivalents of C$207 million ($208 million), being much higher than C$97 million ($99 million) in the year-ago quarter. Long-term debt was reduced to C$4.60 billion ($4.58 billion) compared with C$4.70 billion ($4.60 billion) at year-end 2011.

Our Analysis

We expect Canadian Pacific to continue delivering strong earnings growth aided by recoveries of volume and pricing. The company is expected to benefit from its coal agreement with Teck Resources Limited and liaisons with Canpotex and Canadian Tire. Further, major commodities will also deliver favorable results for the company.

However, competitive threats from its major rivals – including Canadian National Railway Company (CNI - Free Report) , highly unionized workforce and regulatory pressures may limit the upside of the stock.

The stock currently retains a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating. For the long term, we have a Neutral recommendation on Canadian Pacific

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