Canadian Pacific Misses Q2 Earnings, Profits Up on Volume - Analyst Blog

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Canada's second largest railway carrier Canadian Pacific Railway Limited ( CP ) reported adjusted earnings per share of C$2.11 (approximately $1.31) in the second quarter of 2014, up 48% year over year. Earnings, however, missed the Zacks Consensus Estimate of $1.38.

Quarterly revenues climbed 12% year over year to C$1.681 billion (approximately $1.562 billion), which also comfortably surpassed the Zacks Consensus Estimate of $1.523. The demand for rail service remained healthy across most of the business segments resulting in year-over-year growth.

In the second quarter, carloads (volume) increased 3% year over year and revenue ton-miles (RTMs), which measure the relative weight and distance of rail freight transported by Canadian Pacific, grew 7% year over year.


Operating income improved 40% year over year to C$587 million (approximately $538 million) on higher shipments, cost efficiency, higher freight rates, lower pension expense and favourable impact of exchange rates. Operating expenses rose 2% year over year to C$1.1 billion (approximately $1 billion) due to higher stock-based and incentive compensation, higher wage and other benefit expense, variable expenses on higher volume, and higher fuel prices. Operating ratio (defined as operating expenses as a percentage of revenues) improved a whopping 680 basis points year over year to 65.1% on continued focus on maintaining asset efficiencies, safety measures and productivity increase.

Liquidity

Canadian Pacific exited the second quarter with cash and cash equivalents of C$369 million (approximately $336 million), down from C$442 million (approximately $432 million) at the end of the second quarter of 2013. Long-term debt decreased to C$4.633 billion (approximately $4.226 billion) from C$4.687 billion (approximately $4.418 billion) at year-end 2013.

Guidance

For 2014, Canadian Pacific expects revenue growth of 6-7% and operating ratio of 65% or lower. Diluted earnings per share growth is expected at 30% (excluding special items) or higher over the 2013 level.  Canadian Pacific also expects capital investment of $1.2 to $1.3 billion.

Other forecasts for the year include average fuel cost per gallon of $3.50 per U.S. gallon. The company expects defined benefit pension income of approximately $50 million and CAD/USD exchange rate of 1.05. In addition, the company expects income tax rate for the year to hover around 28% .

Our Analysis

Going ahead, we expect Canadian Pacific to deliver strong earnings growth aided by improved volume and pricing. The company is expected to benefit from its coal agreement with Teck Resources Ltd. ( TCK ) and draw synergies from its agreements with Canpotex and Canadian Tire. Further, focus on volume expansion, operational efficiency, pricing revision and network capability upgrade bode well for the company.

However, a weak coal business, commodity risks related to purchase of diesel fuel, and competition from other Canadian and U.S. companies like Canadian National Railway Company ( CNI ) and Union Pacific Corp. ( UNP ) act as headwinds for the company.

Currently, Canadian Pacific has a Zacks Rank #2 (Buy).


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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 , Earnings , Stocks

Referenced Stocks: UNP , CNI , TCK , CP

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