CP 1Q2020: Revenue, OR Records; Capex Maintained; No Dividend Increase; No Share Buybacks

Canadian Pacific Railway set records for operating ratio and revenues in the first quarter of 2020, and will continue to invest capital in anticipation of an economic recovery, rather than increase its shareholder dividend and buy back shares—a strategy at least one Wall Street analyst is calling “noteworthy, prudent and logical.” For the remainder of the year, the railroad expects volume to decrease somewhat, with adjusted diluted earnings per share flat.

CP’s 1Q2020 operating revenues increased by 16% to a Q1 record C$2.04 billion, from C$1.77 billion last year. Reported diluted EPS was C$2.98, a 4% decrease from C$3.09 last year, and adjusted diluted EPS was C$4.42, a 58% increase from C$2.79 last year. The OR improved by 1,010 basis points to a Q1 record 59.2%. Operating income increased by 54% to C$834 million from C$543 million last year.

CP has updated its 2020 outlook “as a result of the ongoing impacts of the COVID-19 pandemic to business operations and the broader macro-economy. Based on CP’s current view of the demand environment, the company now expects volume, as measured in revenue ton-miles, to be down mid-single digits and adjusted diluted EPS to be roughly flat year over year. In spite of currency headwinds, CP continues to expect capital expenditures of C$1.6 billion as the company takes advantage of available track time to better position the network for recovery and support long-term shareholder returns.”

CP’s revised guidance assumes a Canadian-to-U.S. dollar exchange rate of 1.40, other components of net periodic benefit recovery to decrease by approximately C$40 million vs. 2019, and an effective tax rate of 25%.

“These impressive results are due to the efforts of our CP family, the leadership of our talented management team and strict adherence to the foundations of our Precision Scheduled Railroading model,” said President and CEO Keith Creel. “The entire CP team is proud to deliver for our customers, shareholders and the broader economy today, and always. We have had a tremendous start to 2020. Our operating team is tried and tested, and has shown exemplary leadership during a challenging period, including now managing the COVID-19 crisis. The same operating model that produced record results for CP during good times now serves us well during challenging economic times. The company is in a strong position from both a balance sheet and liquidity perspective. As we navigate through this extraordinary period, we remain well-positioned not only to weather this storm, but to recover stronger on the other side. I could not be prouder of the team, particularly those on the operating side who continue to deliver for North Americans.”

COWEN INSIGHT

CP’s 1Q20 results saw a top-through-bottom beat and 1Q record OR,” notes Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidel. “Lowered earnings guidance was expected, and management’s decision to maintain and prioritize capex in lieu of a dividend raise was noteworthy but logical, as it will have the network ready for when volumes return. CP continues to deliver on its operational plan despite a still-challenging macro environment. The gradual energy markets recovery could mean upside to the company’s guidance. We’re lowering our stock price target to C$260 as we incorporate COVID-19 impacts into our model, but continue rating CP shares Outperform.

“CP’s adjusted 1Q20 EPS of C$4.42 represented 58% y/y growth and was above our and consensus estimates of C$3.84 and C$4.06, respectively. Operating income increased 54% to C$834 million, also ahead of our and Street forecasts of C$739 million and C$745 million respectively. The OR of 59.2% is ~300bps and ~260bps better than our and consensus estimates, respectively. Revenue grew 16% to C$2.04 billion, above our and Street expectations of CC$1.95  billion. Revenues for each of CP’s carload types other than Metals, Minerals, and Consumer and Intermodal outpaced consensus estimates. Other revenue was in line with our estimate.

“CP management’s pricing outlook for ‘inflation plus’ was relatively conservative but understandable, given the significant uncertainties in the economy. Results of our recent 1Q20 rail shipper survey show shippers expecting a significant decline in rail pricing in the coming six months. That said, average revenue per carload increased 6.6% y/y for CP in the quarter, well ahead of our 2.1% growth estimate. Unsurprisingly, full-year volume guidance was lowered to down-mid-single-digits from mid-single-digit growth, and adjusted EPS is now expected to be roughly flat y/y compared to prior guidance for high-single-digit to low-double-digit growth. Management’s guidance includes a recovery in 2H2020 but not a complete return to normalcy—something CP projects not to occur until 1Q2021.

“Interestingly, management is choosing to maintain capex guidance of C$1.6 billion while pausing its share buyback and maintaining—but not increasing—the dividend. It is perhaps surprising that it isn’t lowering capex in light of economic weakness, especially given that this seems to be the approach of other companies across sectors. However, we believe that management’s longer-term approach of investing in the network now so CP can handle increases in volumes at later dates is prudent, and is further evidence of the high quality of business and longer term outlook that the railroads possess.”

CP President and CEO Keith Creel, Executive Vice President and COO Mark Redd and Executive Vice President and Chief Marketing Officer John Brooks will be Railway Age Editor-in-Chief William C. Vantuono’s guests for a Rail Group On Air Podcast that will be available on Monday, April 27.