Canadian Pacific Delivers Mixed Bag - Analyst Blog

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Canadian Pacific Railway Limited 's ( CP ) adjusted earnings per share of 90 Canadian cents (approximately 89.1 cents) for the second quarter of 2012 surpassed the Zacks Consensus Estimate of 88 cents. Adjusted earnings per share registered a 20% increase from 75 Canadian cents earned in the year-ago quarter given higher freight revenues across most of the commodity segments.

Adjusted earnings for the second quarter 2012 excluded the negative impacts of 30 Canadian cents per share related to management transition and advisory costs and change associated with the income tax rate.

Revenues increased 8% year over year to C$1.366 billion (approximately $1.353 billion) but fell below the Zacks Consensus Estimate of $1.416 billion.

On a year-over-year basis, carload (volumes) dipped 1%, while revenue ton miles, which measure the relative weight and distance of rail freight transported, upped 1%.

Operating income increased 3.5% year over year to C$239 million (approximately $236.7 million). Operating expenses increased 9% year over year to C$1,127 million (approximately $1,116 million) primarily due to a substantial hike in purchased services and other cost (up 19.4% year over year) followed by depreciation and amortization expenses (up 10.7% year over year) and higher compensation expenses (7% year over year).

Operating ratio (defined as operating expenses as a percentage of revenue) deteriorated 80 basis points to 82.5% from 81.7% in the year-ago quarter.

Liquidity

Canadian Pacific exited the second quarter with cash and cash equivalents of C$82.0 million, which was much lower than C$268.0 million in the year-ago quarter. Long-term debt was C$4.75 billion compared with C$4.70 billion at year-end 2011.

Our Analysis

We expect Canadian Pacific to deliver strong earnings growth aided by volume recoveries and pricing. The company is expected to benefit from its coal agreement with Teck Resources Limited ( TCK ) and liaisons with Canpotexand Canadian Tire. Further, major commodities will also deliver favorable results for the company.

However, competitive threat from major rivals like Canadian National Railway Company ( CNI ), a highly unionized workforce, and regulatory pressures may limit the upside potential of the stock.

The stock currently holds a short-term (1-3 months) Zacks #3 Rank (Hold). For the long term, we have a Neutral recommendation on Canadian Pacific.


 
CDN NATL RY CO (CNI): Free Stock Analysis Report
 
CDN PAC RLWY (CP): Free Stock Analysis Report
 
TECK RESOURCES (TCK): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CNI , CP , TCK

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