Canadian Pacific Railway Limited’s (CP) adjusted earnings per share of C$1.14 ($1.17) per share for the third quarter of 2011 missed the Zacks Consensus Estimate by a penny. However, adjusted earnings of the third largest Canadian railway slid 2.6% from C$1.17 per share in the year-ago quarter. The company registered a strong recovery from the difficult operating environment resulting from floods that affected the first half results. Subsequently, the trailing impact went on to dampen the quarter’s results.
Revenues increased 2.2% year over year to C$1.34 billion ($1.37 billion) but were below the Zacks Consensus Estimate of $1.41billion. The year-over-year growth was backed by a positive price mix and increased fuel surcharges that compensated for lower volumes.
On a year-over-year basis, Carloads (volumes) dropped 2.5% and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian Pacific, fell 3.6% mainly due to drastic declines in Intermodal and Grain volumes. The floods lowered train speed and disrupted train operations, resulting in restricted productivity and network capacity.
Operating income declined 3.9% year over year to C$324.6 million ($332.0 million). Operating expenses crept up 7.2% year over year primarily due to higher fuel expenses (up 43.2% year over year). Operating ratio (defined as operating expenses as a percentage of revenue) deteriorated 210 bps to 73.7% from 75.8% in the year-ago quarter.
Liquidity
Canadian Pacific exited the third quarter with cash and cash equivalents of C$97.0 million, which was much lower than C$267.8 million in the year-ago quarter. Long-term debt increased to C$4.0 billion from C$3.9 billion in the second quarter.
Our Analysis
Canadian Pacific showed sequential growth in revenue on pricing recoveries. We expect Canadian Pacific’s earnings to eventually rebound, supported by strong pricing. Volumes are also expected to recover from a lull as service level returns to normal levels. In addition, long-term investments and rising coal volumes resulting from an agreement with Teck Resources Limited (TCK) are expected to yield higher profitability in future.
However, rising fuel prices, lackluster earnings, competitive threats from railroads like Canadian National Railway (CNI), a strong Canadian dollar, highly unionized workforce and regulatory pressures, increasing headcount as well as negative impacts on the automotive business due to the Japan disaster compel us to have a negative outlook on the company.
Thus, we currently maintain our long-term Underperform recommendation on Canadian Pacific. However, the stock holds a short-term (1-3 months) Zacks #3 (Hold) Rank.
CDN NATL RY CO (CNI): Free Stock Analysis Report
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TECK RESOURCES (TCK): Free Stock Analysis Report
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