“Despite the continued COVID-19 impacts, volumes steadily improved over the second half of 2020 and we saw revenue ton-mile growth in the fourth quarter,” Canadian Pacific (CP) President and CEO Keith Creel reported Jan. 27 during the railroad’s quarterly earnings announcement.
Revenues of C$2.01 billion were down 3% from C$2.07 billion in fourth-quarter 2019, with RTMs up 2%. Operating income of C$928 million rose 4% from C$890 million in fourth-quarter 2019. The railroad’s operating ratio came in at 53.9%, improving by 310 basis points (bps).
For the full year, revenues decreased 1% to C$7.71 billion compared with C$7.79 billion in 2019, and operating income rose 6% to C$3.3 billion vs. C$3.1 billion in the prior year. The operating ratio improved by 280 bps to a “record-low” 57.1%—“driven by operating efficiencies, reduced casualty and lower fuel price,” according to CP.
Looking at 2021, CP reported capex of C$1.55 billion, and anticipated “high single-digit revenue ton-mile growth.” In addition, the railroad said it was “well positioned to deliver double-digit earnings growth in 2021.”
“The uncertainty caused by the COVID-19 pandemic dramatically disrupted global supply chains,” Creel, Railway Age’s 2021 Railroader of the Year, said. “By leveraging our unique growth opportunities and applying our precision scheduled railroading operating model, CP is continuing to lead the industry. The momentum we’ve created in the fourth quarter will continue into 2021.”
Cowen Insight: ‘Proud CP Keeps on Rolling’
Fourth-quarter “EPS results came in above expectations, as total carloads turned positive for the first quarter since the onset of the pandemic,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “A first look into 2021 outlook suggests double-digit earnings growth driven by growth in volumes, further OR improvements and share repurchases. We raise our USD price target to $378 and reiterate Outperform.”
Cowen’s Key Takeaways:
• “Adj[usted] EPS of CAD $5.95 beat our and consensus estimates. An impressive OR of 53.9% was an improvement of ~300 bps Y/Y. This more than offset a modest decline in revenues.
• “Specifically, revenues declined slightly to CAD $2,012MM, slightly below the consensus of CAD $2,072MM. This was driven by a 6.2% decline in revenue per carload (largely due to a mix shift towards more intermodal) and partially offset by a 3.7% increase in total carloads. Automotive and Grain were the best segment performers, growing at 21.7% and 14.9% respectively. Chemical & Plastics was the largest declining segment at 20.3%. As we look at our QTD carload data, total traffic is trending ~6% above last years levels, led by Metallic Ores and Minerals at 34%, as well as a rebound in Coal at 29%.
• “Looking into 2021, management anticipates margin improvements in excess of 100 bps (although would not commit to 300 bp when pressed on the call), leading to double digit adj. EPS growth. Drivers of outlook anticipate the refined fuel market normalizing from lows seen at the onset of the pandemic (potential room for upside regarding the Dakota pipeline, and management sees spreads becoming more favorable in 2021), recovery of Diluent in 2H21, growth in forest contracts, and continued contract wins in the automotive segment. CP also stated that sustained elevated demand through e-commerce and inventory restocking should position well for strong growth on the intermodal front.
• “Despite some elevated costs expected in 2021 (CAD ~$30MM in comp and benefits from pension costs, as well as a CAD ~$45MM headwinds in depreciation due to a larger asset base), management was confident in their ability to expand margins in 2021 and lead the industry.
• “CP announced a new buyback authorization of 2.5% of their total shares outstanding, allowing the company to continue to return capital to shareholders; in 2020, CP returned CAD $2Bn to shareholders via buybacks and dividends.
• “CP continues to demonstrate outperformance amongst its railroad peers and continued tailwinds of PSR in 2021 while some of its industry peers are later in their life cycle, in our view. Management expressed a bullish tone heading into 2021 following an impressive 2020 when considering the macro landscape.
• “We are adjusting our 2021 and 2022 EPS estimates to CAD $20.85 from CAD $20.35 and CAD $22.85 from CAD $22.20, respectively. In USD, our 2021 and 2022 EPS estimates go to $16.42 from $15.07, and $17.99 from $16.44. Using a 21x multiple and our new 2022 EPS estimate, our price target goes to $378 USD from $345 USD. Reiterate Outperform.”