CP: “Disciplined Approach to Sustainable, Profitable Growth”

Written by Andrew Corselli
image description

Canadian Pacific President and CEO Keith Creel.

Canadian Pacific (CP) announced its 4Q19 results—including record revenues of C$2.07 billion, an operating ratio of 57%, improved diluted earnings per share of C$4.82 and a record adjusted diluted EPS of C$4.77—as well as its full-year 2019 figures, which were highlighted by a 7% revenue increase to a record C$7.79 billion.

4Q19 Results

  • Revenues increased 3% to C$2.07 billion, from C$2.01 billion in 4Q18.
  • OR increased by 50 basis points to 57%.
  • Diluted EPS improved 26% to C$4.82, from C$3.83 in 4Q18. Adjusted diluted EPS rose 5% to C$4.77, from C$4.55 in 4Q18.

Full-Year 2019 Highlights

  • Diluted EPS increased 29% to a record C$17.52 from C$13.61, while adjusted diluted EPS rose 13% to C$16.44, from C$14.51.
  • OR improved to 59.9%, a 140 basis points improvement year-over-year.

“CP’s strong operational performance and commitment to controlling costs enabled the railway to be successful despite headwinds to our bulk franchise,” said Keith Creel, CP President and CEO. “We continue to take a disciplined approach to sustainable, profitable growth—a plan rooted in the foundations of precision scheduled railroading. This approach in 2019 enabled CP to once again deliver its highest-ever revenues and the lowest-ever yearly operating ratio.”

“Global economic uncertainty caused by geopolitical and macroeconomic challenges slowed rail volumes across North America,” said Creel. “By leveraging our unique growth opportunities and applying our precision scheduled railroading operating model, CP led the industry in volume growth for the second year in a row and, once again, delivered on its guidance.”

“Our industry-leading CP family remains focused on safely harnessing our network capacity to provide unique solutions that leverage our network strengths and our superior service,” said Creel. “As we head into 2020 and beyond, I’m confident we’ll continue to see wins in the marketplace enabling us to continue to outpace the economy and our peers.”

Full-Year 2020 Guidance

  • High-single-digit to low-double-digit adjusted diluted EPS growth relative to 2019’s adjusted diluted EPS of C$16.44.
  • Mid-single-digit volume growth, as measured in revenue ton-miles.
  • Capital expenditures of C$1.6 billion.

CP said its guidance “is based on the following key assumptions”:

  • Effective tax rate of 25%.
  • Other components of net periodic benefit recovery will decrease by approximately C$40 million vs. 2019.

Download Canadian Pacific’s earnings presentation

The Cowen Insight

“Strong growth is ahead; CBR (crude by rail) could drive it even higher,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “We’re projecting ~10% EPS growth this year on higher RTMs (revenue ton-miles) and margin improvement. Incremental crude business in 1Q20 could provide notable upside to our estimate. Canadian grain, domestic intermodal and forest products are poised for solid performances. We’re raising our price target to US$291, from US$269, and maintaining our Outperform rating.

“CP’s adjusted 4Q19 EPS of C$4.77 represented 5% y/y growth and was above our and consensus estimates of $C4.67 and C$4.66, respectively. Operating income increased 2% to C$890 million, also ahead of our and Street forecasts of C$879 million and C$874 million, respectively. The operating ratio (OR) was 57.0%, ~50bps worse than last year (40bps and 20bps worse than our and consensus estimates, respectively). Revenue grew 3% to C$2.069 billion, above our and Street expectations of C$2.025 billion and C$2.022 billion, respectively.

“CP achieved these results as mildly lower volumes were more than offset by cost and efficiency management, a slightly positive mix, and price increases within the company’s targeted range (likely 3-4%). It appears that CP gained momentum steadily throughout the quarter and into January, which should result in a strong performance in 1Q20, for which we are projecting 21% EPS growth and a 65% OR. That said, the company may get some one-time, high-margin CBR business in the first quarter, resulting in significant upside to our estimate. In any case, much of the earnings growth this year should be attributable to the first half, and we have modeled for such.

“CP exited 2019 having moved the largest Canadian grain and grain products tonnage in a single year in its history. With the delayed harvest and extreme wet weather in Vancouver, Canadian grain shipments should remain strong through 1H20. Crude was another record at 36,000 carloads in 4Q19, and the strength should continue at least in the near term. Other growth drivers this year should include potash, domestic intermodal and forest products.

“CP achieved material y/y improvement in most of its service metrics in the quarter, including a 9% decrease in terminal dwell time, an 11% increase in car-miles/car day, a 5% improvement in locomotive productivity, and better safety metrics.

“We are raising our 2020 and 2021 EPS estimates to C$18.10 and C$19.55, from C$17.80 and C$19.20, respectively. Our U.S. dollar price target rises from $269 to $291, based on our new 2021 USD EPS estimate of $14.92 ($14.55 previously) and a 19.5x multiple, up one point from our prior multiple as the company continues to demonstrate strong execution, and as some of its markets improve. 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 rate CP Outperform.”

Categories: Class I, Freight, Intermodal, News Tags: , ,