CP sees best-ever Q4

Canadian Pacific Railway had its best-ever fourth quarter, with revenues up 5% to $1.71 billion and an operating ratio of 56.1 for the October-December 2017 period. The Calgary-based company said earnings per share increased 159% to $6.77, which included an income tax recovery of $527 million, primarily as a result of U.S. tax reform net of Canadian provincial tax rate increases. Adjusted diluted earnings rose 6% to a new quarterly record of $3.22.

“The fourth quarter was a record by almost every measure and should be celebrated by the men and women in the CP family who work hard every day to deliver for our customers and shareholders,” said Keith Creel, CP President and Chief Executive. “2017 was a positive year where we continued to build the foundation for sustainable long-term growth by enhancing our service offering, strengthening our team of professional railroaders, and furthering strategic partnerships with customers.”

Citing a “disciplined growth strategy” and fundamentals of precision railroading, full-year earnings rose to $16.44 per share, up 55%, and full-year adjusted earnings to $11.39, an increase of 11%. The full-year operating ratio was 57.4, and adjusted operating ratio was a record 58.2. Revenues for the year increased 5% to $6.55 billion from $6.23 billion.

“Over the course of 2017 we built momentum thanks to our strategic approach to growth combined with our continued focus on operational excellence,” Creel said. “That momentum has us well-positioned to start 2018 and we look forward to delivering another year of record results in a safe and disciplined manner.”

Creel said the railroad’s 2018 plan that balances strategic growth with continued productivity improvement should see revenue growth in the mid-single digits and adjusted earnings in the low double-digits.

The company plans to invest between $1.35 billion to $1.5 billion in capital programs in 2018.

In a note to investors, Cowen & Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl wrote, “4Q17 EPS exceeded consensus estimates, but 2018 earnings guidance came in lighter than expected. However, we think there’s more upside than downside to 2018 guidance. Management’s conservative pricing assumptions, a tighter trucking market and market share opportunities offer upside. We are maintaining our Outperform rating.”

The carrier’s revenue in-line with Cowen’s and consensus estimates, “but the company’s operating ratio of 56% was above our 55.3% forecast and consensus’ 55.8% estimate. EPS of C$3.22 was shy of our C$3.28 estimate but ahead of consensus’ C$3.21.”

New contracts are being signed at a 2.5-3% rate increase – the same range that management is utilizing in their 2018 guidance. “We think that’s likely a conservative estimate and could see the all-in average rate for 2018 coming in the 3% to 3.5% range,” Seidl wrote. “Based on our recently published 4Q17 Rail Shipper Survey, shippers are expecting to see 3.5% price hikes in the next six to 12 months…up 30 basis points sequentially from our 3Q17 survey. The 4Q17 response marks the third consecutive quarterly increase in shipper expectations and is one reason we think the rails are well-positioned to continue raising price, especially given the conditions in the trucking market. We’re looking for 5% revenue growth in 2018, with the majority of that growth coming from yield rather than volumes.”

Seidl expects the U.S. tax changes to stimulate further share repurchases, which will ramp up in the fourth quarter.

“2018 guidance for mid-single digit revenue growth and low-double digit EPS growth was slightly disappointing relative to consensus expectations. At the time of the release, consensus was forecasting 15% EPS growth. While our new 2018 forecast of C$13.40 is modestly lower than our prior estimate of C$13.65, we are still looking for 17% EPS growth. Our new 2019 EPS forecast is C$14.75. Our 2018 and 2019 EPS forecasts in USD terms are $10.45 and $11.80.”