CP 2Q19: “Growth across every line of business”

Written by Andrew Corselli, Managing Editor
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Canadian Pacific Railway (CP) announced it set record second-quarter revenues of C$1.98 billion, an increase of 13% from last year’s C$1.75 billion, and a second-quarter operating ratio record of 58.4%, a 580 basis point improvement over last year’s second-quarter operating ratio of 64.2%.

In addition, CP posted record earnings per share (EPS) with reported diluted EPS of C$5.17, a 70% increase from C$3.04 last year, and an adjusted diluted EPS of C$4.30, a 36% increase from last year’s C$3.16. Net operating income grew 66.1%, from C$436 million in 2Q18 to C$724 million in 2Q19. Operating expenses of C$1.16 billion were 2.86% higher than 2Q18’s C$1.12 billion.

For the six months ended June 30, CP operating revenues were C$3.74 billion, a 9.7% increase from the same period in 2018. Net operating income grew 47.7%, from C$784 million in first-half 2018 to C$1.16 billion in first-half 2019. Operating expenses rose 5.97%, to C$2.38 billion, over first-half 2018’s $C2.25 billion. First-half diluted EPS of C$8.25 was a 51.7% improvement over the prior-year period’s C$5.44. The operating ratio for the first six months of 2019 was 63.5%, a 230 basis point improvement over 2018’s 65.8%.

“This quarter, we saw revenue growth across every line of business, strong operating metrics, and our best-ever second-quarter performance from a workload perspective, as measured by gross ton-miles,” said CP President and CEO Keith Creel. “As has been proven time and again, our operating model can perform well in all economic conditions, and we will remain disciplined in controlling our costs and doing what we said we would do. Our strategy for sustainable, profitable growth is working, and we look forward to a strong finish to 2019. I commend the team for this record second-quarter performance. These results demonstrate the strength of precision scheduled railroading and are a testament to our collective commitment to deliver for our customers and the broader economy.”

“CP recorded a top to bottom beat of Street estimates, achieving record results in the quarter,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Revenue opportunities with the newly signed Yang Ming contract and with an expanded auto contract, coupled with management’s positive crude by rail outlook, contribute to a constructive longer-term outlook. We raise our estimates and price target and maintain our Outperform rating. Management believes that they can improve their OR by a point or so each year for the next few years, which would bring CP to an OR in the mid-50s. CP outlined new and expanded revenue opportunities, and provided an update on the latest regarding CBR. Among the revenue opportunities  was the newly signed contract with ocean shipping company Yang Ming, which CP will service through the GCT Deltaport terminal in British Columbia, and an updated contract with Hyundai. Amids headlines that new Alberta Premier Jason Kenney and his United Conservative government are looking to find a buyer for the railcar leases and guaranteed haulage commitments that Kenney’s predecessor agreed upon prior to leaving office, CP is currently in discussion with the government and private-sector parties and believes that a resolution is on the way, though it may not be until later in the year. In the quarter, CP did about 25,000 CBR carloads, and believes that in 3Q19 it can ramp up to 30,000 carloads, with potential for further upside to that number.”

For a perspective on the current concentration on operating ratio, see:

Beware the operating ratio trap

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