Canadian Pacific Posts Mixed 4Q - Analyst Blog

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Canadian Pacific Railway Limited 's ( CP ) adjusted earnings per share of C$1.30 ($1.27) in the fourth quarter of 2011 was well ahead of the Zacks Consensus Estimate of $1.09. Adjusted earnings of the fourth largest Canadian railway rose 19.3% from C$1.09 per share in the year-ago quarter, on the back of strong freight rates across the railroads that compensated for subdued volumes.  

For fiscal 2011, adjusted earnings went down 13.3% year over year to C$3.34 ($3.38 billion). The company witnessed a strong turnaround from the difficult operating environment resulting from the floods that affected the first half results. Subsequently, the impact went on to dampen the year's results.  

Revenues for the quarter increased 8.8% year over year to C$1.4 billion ($1.37 billion) but were a tad below the Zacks Consensus Estimate of $1.5 billion. The year-over-year growth was backed by a positive price mix and increased fuel surcharges that compensated for lower volumes. Revenues for the year increased 3.9% year over year to C$5.2 billion ($5.3 billion). 

On a year-over-year basis, Carloads (volumes) remained flat at 676,000 units in the reported quarter while Carloads for the full year dropped 2% year over year to 2.5 million units, mainly due to lower Coal, grain and intermodal volumes coupled with lowered train speed and disrupted train operations owing to the floods that resulted in restricted productivity and network capacity in the first half of the year. 

Quarterly operating income inched up 1.7% year over year to C$303 million ($296.2 million) but operating income for the year declined 13.4% year over year to C$967 million ($978 million).  

Operating expenses crept up 10.9% and 8.9% year over year in the fourth quarter and full year 2011, respectively, due to higher fuel expenses that grew a respective 32.2% and 33% year over year in the fourth quarter and full year 2011. Operating ratio (defined as operating expenses as a percentage of revenue) deteriorated 150 and 370 basis points to 78.5% and 81.3% in the fourth quarter and full year 2011, respectively.

Liquidity

Canadian Pacific exited the fourth quarter with cash and cash equivalents of C$47.0 million, much lower than C$361 million in the year-ago period. Long-term debt increased to C$4,695 million in 2011 from C$4,033 million in 2010.

Guidance

Management maintains its long-term operating ratio range of 70-72%. For 2012, management expects capital expenditures in the range of $1.1 - $1.2 billion. The tax rate for 2012 is expected to range between 25% and 27%.

Our Analysis

The company expects to deliver strong financial results in the coming years, riding on its multi-year plan that involves expanding network capacity to support higher shipments and summon cost improvements. Canadian Pacific registered sequential revenue growth on pricing recoveries. We expect Canadian Pacific's earnings to eventually rebound, supported by strong pricing. In addition, long-term investments are expected to yield higher profitability in future. However, rising fuel prices, lackluster earnings, competitive threats from railroads like Canadian National Railway ( CNI ), exchange rate fluctuations, a highly unionized workforce and regulatory pressuresremain headwinds for the stock.

Thus, we currently maintain our long-term Neutral recommendation on Canadian Pacific. The stock holds a Hold rating in the short-term (1-3 months), represented by the Zacks #3 Rank.


 
CDN NATL RY CO ( CNI ): Free Stock Analysis Report
 
CDN PAC RLWY ( CP ): 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

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