Canadian Pacific (CP) announced that its third-quarter 2020 financial and operating results played out as “expected,” as the railroad “steadily built momentum” and “persevered” through 2020.
CP recorded a net profit of C$598 million (US$453.49 million), falling 3% from last year’s C$618 million (US$468.65 million); and revenue of C$1.86 billion (US$1.41 billion), decreasing 6% from last year’s C$1.98 billion (US$1.50 billion). It posted an operating ratio of 58.2% in 3Q20.
Other CP 3Q20 highlights:
• Strong operational performance in average train weights and average train lengths.
• Reported diluted EPS of C$4.41 (US$3.34), a 1% decrease from C$4.46 (US$3.38) last year; and adjusted diluted EPS of C$4.12 (US$3.12), an 11% decrease from C$4.61 (US$3.50) last year.
• Operating ratio was 58.2%, a 210 basis point increase over last year’s third-quarter operating ratio of 56.1%.
• Federal Railroad Administration (FRA)-reportable personal injuries declined 26% to 1.06 from 1.44 in 3Q19, and CP’s FRA-reportable train accident frequency dropped 14% versus 3Q19 to 1.13 from 1.311.
“Following our record Q2 performance, we steadily built momentum through the quarter and finished strong,” CP President and CEO Keith Creel said. “Thanks to our industry-leading operating model [PSR] and world-class employees, we have persevered throughout 2020 and have significant momentum as we approach 2021.
“Our third quarter highlighted the strength of our bulk franchise and the power of our domestic intermodal and automotive operations,” Creel said. “Additionally, we built on our record average train weights and train lengths from Q2 and carried that through Q3. We remain committed to innovating and to making incremental, sustainable gains.”
CP said that it expects a “low-single-digit decline in revenue ton-miles in 2020 and at least mid-single-digit adjusted diluted EPS growth.” It also “continues to expect capital expenditures of C$1.6 billion [US$1.21 billion] in 2020.”
“We continue to deliver for our customers and for the North American economy,” Creel said. “With Q4 volumes up 8% quarter to date and a strong outlook for the remainder of the year, we have raised our guidance to at least mid-single-digit adjusted diluted EPS growth. Given the strength of our operating model and growing momentum across our business, I remain confident that the best is yet to come.”
Cowen Insight: ‘Turning the Corner, Canadian Style’
“3Q results came in a little light, with EPS missing Cowen and [the S]treet estimates,” said Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “However, CP is expecting their best 4Q OR ever in 4Q20 and slightly raised their 2020 EPS guide. New business opportunities in the East and using land assets to attract other new customer opportunities should excite investors. We roll our model forward to 2022 and raise our PT to $345.”
The analysts’ key takeaways are:
• “CP posted 3Q20 adjusted EPS of C$4.12, down 11% y/y and below our and consensus estimates of $C4.37 and C$4.30, respectively. Operating income decreased 10% y/y to C$779MM, also below our and Street forecasts of C$822MM and C$792MM, respectively. The operating ratio (OR) was 58.2%, ~210bps worse than last year, and ~220bps worse than our estimate, and ~80bps worse than consensus estimates.
• “Revenue fell 6% y/y to C$1.863 bn, slightly below our C$1.870 bn estimate and slightly above the Street’s C$1.860 bn expectation. Relative to Street estimates, revenues for CP’s Grain, Fertilizer & Sulphur, Forest Products, Automotive, and Intermodal beat, while Coal, Potash, Energy Chemicals & Plastics, Metals Minerals & Consumer Products, and ‘Other’ revenue missed.
• “Full-year adjusted diluted EPS guidance was raised to at least mid-single-digit growth in 2020 vs. 2019, compared to prior guidance of simply growth y/y. This guidance incorporates the rebound in demand we have seen since September and assumes minimal crude-by-rail volumes. Pricing commentary on the call was limited, which in our view was not a function of any pricing concerns or weakness but rather a reflection of analyst focus on the call on CP’s other revenue growth opportunities and margin outlook. With fuel prices still lagging, length of haul constantly changing, and truck prices likely favorably impacting intermodal (though on a lag), rev/carload has a number of moving parts.
• “CP expects 4Q20 operating ratio (OR) to be the best fourth quarter OR in the company’s history. 4Q18’s ~56.5% was the company’s previous 4Q record; a 4Q20 OR below this figure is at least 100bps better than our model at the time of the release. Further, we believe that a mid-50s percent OR for 2021 is achievable (ex. negative impacts from fuel and stock comp).
• “CP continues to demonstrate that they are on a different part of their lifecycle compared to U.S peers still implementing PSR (KSU, NSC, and UNP). In the last few weeks, they announced the purchase of the remaining part of a bridge that they didn’t already own (which should reduce expenses for use of the bridge) and also gave further details around a new transload and distribution facility in Vancouver with A.P. Moller – Maersk. With CP still owning over 1,000 acres, we believe they will continue to look for opportunities for land development similar to this Maersk deal.
• “We are adjusting our 2020 and 2021 EPS estimates to C$17.60 and C$20.35, from C$17.50 and C$20.25. In USD, our 2020 and 2021 EPS estimates go to $13.08 and $15.07 from $13.00 and $15.00, respectively. In addition, we are adding 2022 estimates of C$22.20, or $16.44, to our model. Adjusting our valuation to this new 2022 estimate and using a 21x multiple, down from 22x as we roll forward a year, our price target goes to $345 from $330.”