Canadian Pacific net slows on higher expenses

Written by Railway Age Staff
Canadian Pacific

Photo: Canadian Pacific

First-quarter profit fell 19.3% at Canadian Pacific Railway on higher expenses across its network.

The Calgary-based railroad announced net income of C$348 million (US$275.8 million) or C$2.41 per share for the quarter ended March 31, off from C$431 million or C$2.93 per share in 2017.

Revenue ton-miles increased 6% as carloads were 4% higher. Revenue increased by 4% to C$1.66 billion from C$1.60 billion.

“This was a challenging quarter, as we battled extreme weather and unprecedented demand, specifically in the northern reaches of our network,” said CP President and CEO Keith Creel. “Despite these challenges, we delivered 6% more freight than last year, demonstrating once again the resiliency of our operating model and the commitment from our family of professional railroaders.”

Intermodal revenue was C$367 million, up from C$325 million. But for grain, where CP and competitor CN struggled with chronic service issues, revenue fell to C$151 million from C$393 million.

“With the extraordinary winter weather behind us, we built a tremendous amount of momentum through March—one of our best months in recent history—positioning us well for the rest of the year,” said Creel.

Operating expenses surged to C$1.122 billion from C$999 million. Fuel costs totaled C$215 million from C$170 million.

CP’s operating ratio was 67.5%, an increase of 510 basis points and 190 basis points from a year ago. Effective Jan. 1, 2018, CP adopted a new accounting standard for the presentation of pension retirement benefits that resulted in a 430 basis point increase in CP’s 2017 operating ratio.

“We continue to produce results using the foundations of precision railroading and remain confident in our ability to deliver sustainable, profitable growth in 2018 and beyond,” Creel said.

COWEN INSIGHT

“CP’s results fell short of our estimate, but there is clearly momentum building in the business as the company comes out of a very difficult operating environment during 1Q18,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “The company continues to hold negotiations with union leadership in hopes of avoiding a strike slated to begin [April 20]. Management appeared to sound like it was willing to take some short-term pain in an effort to position the company properly for the future. Hence the likelihood of a strike at this point remains high in our opinion.

“Pricing has accelerated over the past few months. Recent contract renewals are averaging 3.8%, which is above the 2.5% to 3% range management noted was embedded in its expectations for 2018 during the 4Q17 call. That range is also what the company was seeing in rate renewals at that point in time. 2018 guidance of mid-single-digit revenue growth and low double-digit EPS growth was maintained.

“CP continues to expect an improved OR in 2018 vs. 2017. We discussed the improving pricing backdrop for the railroads in our 1Q18 Rail Shipper Survey. Given the unchanged guidance after difficult weather-related operating conditions, in addition to the positive pricing commentary we think investors could view the result somewhat favorably.

“We are lowering our C$ EPS estimate for 2018 to C$13.35 from C$13.40. This accounts for the 1Q18 miss vs. our estimate offset in part from slightly higher pricing expectations. Our 2019 C$ EPS estimate goes to C$14.70 from C$14.74. Our new USD EPS estimates are $10.42 and $11.76 for 2018 and 2019, respectively. That’s down from $10.45 and $11.79 previously. We continue to apply a 20x multiple on our 2018 USD EPS estimate to arrive at our new $208 target price, down from $209 previously.”

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