“Our ability to deliver sustainable, profitable growth has never been stronger,” Canadian Pacific (CP) President and CEO Keith Creel said during the railroad’s second-quarter 2021 earnings announcement.
CP reported on July 28 record revenues of C$2.05 billion for the three months ending June 30, 2021—a 15% jump over the same period last year (C$1.79 billion)—with revenue ton-miles up 9%, FX (foreign exchange) down 5% and fuel costs up 3%.
The Class I railroad also reported “record >30MMT Canadian grain and grain products moved in the 2020-2021 crop year; strong demand fundamentals in potash and coal; and energy, chemicals and plastics volumes exceeding expectations.” Additionally, CP said it expects automotive to “continue to outperform as the chip shortage eases and inventory levels remain low,” and that intermodal restocking will continue into 2022, “fueling domestic and international growth.”
CP reported a second-quarter 2021 operating ratio of 60.1%—up 310 basis points due to Kansas City Southern (KCS) acquisition-related costs. Adjusted, OR improved 170 basis points to a second-quarter record of 55.3%. These compare to second-quarter 2020’s OR of 57.0%. Diluted earnings per share for second-quarter 2021 came in at a record C$1.86, up 100% from the previous-year period’s C$0.93; adjusted EPS was a record C$1.03, up 27% from $0.81 last year, according to CP.
“Our industry-leading team of railroaders delivered another record quarter,” Creel said. “I am particularly proud of our all-time record safety performance made possible by the collective efforts of the more than 12,000-strong CP family. The robust base demand environment coupled with our unique growth opportunities has CP extremely well positioned as we head into the second half of the year.”
Looking ahead, Creel said: “We remain confident in our full-year guidance of double-digit adjusted diluted EPS growth relative to 2020’s adjusted diluted EPS of $3.53.”
When questioned about the CN/KCS potential merger and whether CP still has a shot, if the STB rejects the CN/KCS voting trust, Creel said, “Consolidation can be beneficial under certain circumstances. We firmly believe that our facts satisfy and complements those certain circumstances where consolidation can be beneficial. So again, we feel very strongly about this. Ultimately, it’s up to the STB; it’s in their capable hands. We stand ready to re-engage with the KCS, should the STB rule in opposition to CN’s voting trust. We’ll see where it goes. We’re in a wait-and-see, just like everyone else.
Cowen Insight: ‘Full Year Intact’
“CP posted a second quarter slightly above expectations on the bottom line, while maintaining its full year EPS guidance of double-digit growth,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “Impacts of the wildfires in Canada are yet to be quantified although management stated it expects to make up some of the lost volumes in the back half of 2021. We adjust our model to reflect the impact of CP operating as a stand-alone company (prior estimates included KSU [KCS]).”
Key Cowen Takeaways:
• “CP reported second-quarter adjusted EPS of $1.03, above the consensus forecast of $1.01 CAD. Adjusted OR improved 170bps to 55.3%. Fuel headwinds in the quarter included approximately $18MM of unfavorable fuel lag, and acquisition-related costs of $99MM were excluded from adjusted operating income.
• “Revenues in the quarter grew by 15% year-over-year as automotive saw strong loadings growth (off weak 2020 comps); coal volumes increased by 33%; and metals, minerals and mining posted 36% volume growth. U.S. grain volumes were up nearly 40% in the second quarter as demand continued to be strong, although in Canada, volumes were lower, which were driven by high grain prices and record movements, which led to lower grain supply and carryout. An early harvest season is expected, and CP believes this will lead to an early peak season. While the impact of the wildfires in July were not quantified, management stated they look to recover some volumes over the back half of the year.
• “Management maintained its double-digit EPS growth for 2021, with the assumption of high single-digit RTM growth. Pricing is expected to remain strong, with intermodal and merchandise carload business topping the high end of CP’s range in terms of pricing. In terms of mix, Q2 was strong with the expectation that it will remain positive over the next two quarters.
• “Given the decision of the KSU Board to move forward with CNI’s [Canadian National’s] bid, we update our model to reflect CP as a stand-alone company (recall our prior estimates included the KSU acquisition hitting in second-half 2022, and we rolled out 2023 estimates). We adjust our 2021, 2022 and 2023 estimates to $3.25 from $3.35; $3.45 from $4.25; and $3.80 from $5.15, respectively. Continuing to use our 21x multiple and our updated 2023 EPS estimate (ex KSU), our price target goes to $80 from $108. While that is admittedly a large drop in our target, it still leaves investors approximately 12% upside (including the dividend). Hence, we are leaving our Outperform rating intact. Should circumstances with the KSU deal saga change, we would not hesitate to re-examine our numbers as we believe KSU could add notable value to the CP franchise.”