CP 2Q20 Results: “Resiliency” in “Some of the Most Challenging Conditions”

Written by Andrew Corselli, Managing Editor
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“We will meet the climate change challenge with the same commitment to service and excellence the CP family brings to everything we do,” said Keith Creel, CP President and CEO.

Canadian Pacific (CP) announced second-quarter 2020 financial and operating results, which saw net profit fall 12% and revenue decrease 9% amid “immense challenges” created by the COVID-19 pandemic. Yet, CP recorded revenues of C$1.79 billion (US$1.3 billion) and a 2Q-record operating ratio of 57% in 2Q20.

CP’s net income was C$635 million (US$473 million) in 2Q20—a diluted earnings per share (EPS) of C$4.66 (US$3.48)—whereas it was C$724 million (US$540 million) with a C$5.17 (US$3.86) EPS in 2Q19.

Other CP 2Q20 figures:

  • Revenues decreased by 9% to C$1.79 billion (US$1.3 billion) from C$1.98 billion (US$1.4 billion) last year.
  • Reported EPS of C$4.66 (US$3.48), a 10% decrease from C$5.17 (US$3.86) last year, and adjusted diluted EPS of C$4.07 (US$3.03), a 5% decrease from C$4.30 (US$3.20) last year.
  • Operating ratio was a 2Q record 57%, a 140 basis point improvement over last year’s 2Q operating ratio of 58.4%.

More info can be found at CP’s financial page.

“The CP family of railroaders has achieved these results during some of the most challenging conditions the world has experienced in recent memory,” said Keith Creel, CP President and CEO. “Our second-quarter results showcase the resiliency of our people and of the precision scheduled railroading (PSR) operating model. The COVID-19 pandemic has created immense challenges, but CP has risen to the occasion, adapted and responded to the benefit of our customers, communities and shareholders. The pride I feel each day coming to work with this team has never been stronger.

“While economic uncertainty remains, we’re controlling what we can control—our costs. Our strong bulk franchise, which included record movements for Canadian grain and potash in the first half of the year, helped to offset some of the declines we experienced in other lines of business. Given our strong cost control measures, industry-leading execution of the PSR model, and improved clarity on the volume environment, we now expect positive adjusted diluted EPS growth for the year. As a result of the continued strength of our balance sheet, we have also restarted our share repurchase program.”

THE COWEN INSIGHT: “2Q WAS EVERYTHING INVESTORS WANTED & MORE

Jason Seidl

“CP posted a 2Q-record OR, beating Cowen and the street top through bottom,” said Cowen and Company analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “With new auto business coming online and new opportunities in the East with the purchase of the CMQ, management appears as bullish as they’ve ever been on the volume outlook for the next two years. We raise our price target to $299 and reiterate Outperform.

“CP’s posted 2Q19 EPS of C$4.07 only 5% lower year over year and well above our and consensus estimates of $C3.63 and C$3.79, respectively. Operating income decreased 6% y/y to C$770MM, also ahead of our and Street forecasts of C$703MM and C$689MM, respectively. The operating ratio (OR) was 57.0%, a 2Q record, ~140bps better than last year, and ~360bps and ~270bps better than our and consensus estimates, respectively.

“Revenue fell 9% y/y to C$1.79 bn, above our and Street expectations of C$1.78 bn and C$1.71 bn, respectively. Relative to street estimates, revenues for CP’s Potash, Forest Products, Energy Chemicals & Plastics, and Automotive units beat. Grain, Coal, Fertilizer & Sulphur, Metals Minerals & Consumer Products, and Intermodal revenues missed. Pricing commentary continued to sound positive with mgmt expecting to push for pricing acceleration into the second half of the year; expectations for a pickup in truck pricing will likely aid their pricing efforts.

“Full-year volume guidance of down mid-single digits was reiterated, while CP now expects their adjusted diluted EPS to grow in 2020 vs. 2019, compared to prior guidance of roughly flat y/y. CP only has minimal crude by rail baked into their volume guidance but from a revenue standpoint, they will continue to get liquidated damages into 2021.

“With new business opportunities and the purchase of the Central Maine & Quebec (CMQ) rail line, we believe CP is well-positioned for volume growth in 2H20 and in the long-term. While auto carloads have recovered quickly industry-wide, CP did caution that the recovery may not necessarily continue at this frantic pace in the coming quarters. However, CP does have the benefit of adding Globus and FCA to their auto franchise.

“CP completed the purchase of the full Central Maine & Quebec rail line last month. This line will give the Class I access to the Port of Saint John and a second port in Searsport, Maine. CP believes the CMQ could generate well north of USD $100MM in revenue by the end of 2022 with CP margins. We believe that the CMQ could be an avenue for CP to capitalize on our expectation for an increase in near-shoring and near-sourcing in the coming years. Mgmt hinted at new vessel sailings and a potential automotive business for that location in the future.”

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