The railroad’s operating ratio slipped to 58.1% from 58.9% in the first quarter, which included a $38-million recovery associated with the early departure of Chief Executive Hunter Harrison, now president and chief executive of CSX. The adjusted operating ratio excluding the gain was 61.3%.
"CP's strong focus on developing its bench strength resulted in a seamless leadership transition and a seasoned executive team that is focused on leveraging CP's proven operating model," said CP President and CEO Keith Creel, in a statement. "Our talented and engaged workforce together with disciplined cost control gives us a great deal of confidence that we'll be able to deliver high single-digit adjusted diluted earnings per share growth in 2017 and create long-term value for shareholders."
Grain and intermodal drove increases in revenue by 9% and 5%, respectively. Among other commodities, metals, minerals, and consumer products turned in a strong performance on shipments of lumber, steel, and frac sand. CP said it moved 17,000 cars of frac sand in the quarter, the most since 2014.
“CP reported solid results and sounded positive about second quarter and the rest of the year,” said Jason Seidl, analyst for Cowen & Co. and a contributor to Railway Age, in a note to investors. “It maintained its 2017 guidance of high single-digit earning per share growth, but the results and [CP management] affirmed our view that the guidance may be a bit conservative. While we are modestly adjusting our earnings forecasts downward, we note we continue to remain above-consensus and are constructive on the stock.”
“Pricing was in the 2.5% to 3% range in the quarter,” Seidl wrote. “We believe there is upside to this result as the year progresses. This is as rail volume growth appears sustainable, while trucking capacity should begin to tighten later this year with the approach of the ELD (Electronic Logging Device) regulations and given the lean trucking fleet sizes.”
Seidl described his outlook for the second quarter as “favorable,” on growth of revenue ton-miles in March continuing in April. “[M]anagement sounded confident that it can improve the operating ratio meaningfully year-over-year and sequentially,” he wrote. He expects the company’s operating ratio to improve by 230 basis points year-over-year and by 160 basis points in the second quarter.
Seidl cut his earnings estimate for 2017 to C$11.80 from C$12 and the 2018 forecast to C$13.50 from C$13.55 on 14% forecast growth in the current year – above CP’s guidance of high single-digit growth. He also lowered his share price target by $1 to $172 based on the same 17x multiple on a new 2018 earnings estimate of US$10.12, down from $10.16. But he maintained an “outperform" rating for CP’s shares.