Canadian Pacific (CP) President and CEO Keith Creel is calling 2021 a “historic” year for the Class I railroad; during a Jan. 27 earnings report, he highlighted overcoming “significant operating challenges—devastating network outages in B.C. and extreme cold temperatures”—and closing merger partner Kansas City Southern into voting trust.
CP posted fourth-quarter 2021 revenues of C$2.04 billion, up 1% from the prior-year period, plus full-year 2021 revenues of C$8.0 billion, up 4% from 2020.
For the three-months ending Dec. 31, 2021, the railroad reported:
• An operating ratio of 59.2%, which included C$36 million in costs related to the KCS acquisition. This compares to the 2020 quarter’s 53.9%. Excluding the acquisition-related costs, the fourth-quarter 2021 operating ratio increased 360 basis points from the 2020 quarter to 57.5%.
• Operating income of C$832 million, down 10% from C$928 million in fourth-quarter 2020. Adjusted, operating income came in at C$868 million, down 6% from C$928 million in 2020.
• Net income of C$532 million, down 34% from C$802 million in fourth-quarter 2020. Adjusted, net income was C$684 million, virtually flat with C$683 million in 2020.
• Diluted EPS of C$0.74, a decrease from C$1.19 in fourth-quarter 2020. Adjusted diluted EPS came in at C$0.95, a decrease from C$1.01.
For full-year 2021, CP posted:
• An an operating ratio of 59.9%, up 280 basis points from 2020, and an adjusted operating ratio of 57.6%, increasing 50 basis points from 2020.
• Operating income of C$3.206 billion, down 3% from C$3.311 billion in 2020. Adjusted, operating income came in at C$3.389 billion, up 2% from C$3.311 billion in 2020.
• Net income of C$2.852 billion, up 17% from C$2.444 billion in 2020. Adjusted, net income was C$2.565 billion, up 7% from C$2.403 billion in 2020.
• Diluted EPS of C$4.18, an increase from C$3.59 in 2020, and adjusted diluted EPS of C$3.76, an increase from C$3.53 in 2020.
“I am tremendously proud of the resilience the CP team demonstrated to deliver these results,” said Creel, Railway Age’s Co-Railroader of the Year for 2022 with KCS President and CEO Pat Ottensmeyer. “CP’s world-class railroaders relied on our strong operating model and commitment to controlling what we can control to safely deliver for customers and shareholders despite the unique challenges faced in the quarter.
“This quarter we also reached a crucial milestone in our journey to create the first single-line rail network linking the U.S., Mexico and Canada by combining with Kansas City Southern. …
“During a historic year for CP, our dedicated team confronted the adversity we faced throughout 2021 head-on with grit and tenacity. I am excited for what lies ahead with this franchise as we move past the uncertainty and extensive supply chain disruptions created by the COVID-19 pandemic. The demand environment and overall economic strength, combined with CP’s unique initiatives and service excellence, have us well-positioned to drive profitable growth for our customers, employees and shareholders. These factors, coupled with the progression of our proposed combination with Kansas City Southern, position CP for another history-making year.”
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THE COWEN INSIGHT: “CP, KSU Tracks Edging Closer”
“CP experienced severe weather in the quarter that fell to the bottom line, coming modestly short of our forecast and consensus expectations,” Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl observed. “Cautious optimism was expressed on the earnings call, although management withheld from providing a financial outlook. The KSU acquisition appears to be on track, and we are encouraged by synergies upon completion. We raise our Price Target to US$82 and reiterate Outperform.”
“Adjusted 4Q EPS came in at C$0.95, below our C$0.97 estimate and the consensus figure of C$0.98. Revenues increased 1% in the quarter despite volumes declining 11% as pricing remained strong. Fuel and FX (foreign exchange) combined to be a 4% tailwind in the quarter. However, the adjusted OR managed to beat our forecast by 30bps.
“Grain volumes were down 21% in the quarter, with revenues decreasing 12%. A 40% decline in grain production is driving the decline in volumes, a trend that will likely remain challenged until new crop rolls in for Q3; better visibility into how the crop season should shake out will be in the Spring. We are currently modeling for a soft 1H for grain and a strong back half as harvest season picks up.
“Potash volumes were down 4% while revenues were up 14%. The decline in volumes was primarily attributed to the flooding in BC. Coal revenues declined 14% while volumes declined 27% (also due to flooding), while modeling a soft half of the year for coal, similar to what we heard from the other Class I’s. Forest products volumes were flat in the quarter with revenues up 10%. The revenue growth in the quarter (similar to the other Class I’s) was driven primarily by price, as volumes were weak across North America.
“Intermodal volumes declined 5% while revenue increased 9%. CP highlighted new facilities opening to bolster its domestic intermodal franchise, helping current customers with new distribution offerings and improving container turns to support overseas. We model intermodal strength to pick up sequentially through 2022, as congestion should ease in the back half of the year, thereby improving volumes on the international side.
“While the KSU acquisition appears to be on track, management refrained from commenting on the future of the integration, given it is still under STB review. KSU provided a quarterly report that highlighted 8% top line growth, driven by strong pricing and a rebound in its intermodal business, which saw positive carload growth and 12% top line growth.
“We adjust our 2022 and 2023 EPS estimates to US$3.20 from US$3.45 and US$3.90 from US$3.95, respectively. Continuing to use our 21x multiple and our new 2023 estimate, our price target goes to US$82.”