Canadian Pacific Outperforms - Analyst Blog

Canadian Pacific Railway Limited (CP), Canada’s second largest railway, reported adjusted earnings per share of 92 Canadian cents (89 cents per share) in the second quarter, surpassing the Zacks Consensus Estimate of 82 cents. Adjusted earnings jumped 96% year over year from 47 Canadian cents per share (40 cents). Earnings were driven by stronger-than-expected economic recovery, cost management as well as a strong volume growth.
 
Revenues climbed 20% year over year to C$1.23 billion ($1.20 billion), primarily driven by higher traffic volumes and increased revenues from the fuel cost recovery program. These factors were partly offset by a negative currency translation and floods in Southern Saskatchewan and Alberta region in June.
 
Carloads (volume) rose 19.9% year over year and revenue ton miles, which measures the relative weight and distance of rail freight transported by Canadian Pacific, shot up 23.1% from the year-ago quarter. Reviving economy and inventory replenishment led to a strong demand for shipments of intermodal, potash, coal, automotive, steel and biofuels, which contributed to the increase in carload and revenue ton miles.
 
Operating income increased 48.2% year over year to C$274.1 million ($266.8 million), attributable to higher freight revenues as well as cost management initiatives, partially offset by the floods and the unfavorable impact of currency translation.
 
Operating expenses upped 13.4% year over year. Operating ratio (defined as operating expenses as a percentage of revenue) improved 430 bps year over year to 77.8% from 82.1% in the year-ago quarter.
 
Liquidity
 
The company generated free cash flow of C$7.1 million compared with negative C$4.6 million in the year-ago quarter. Cash and cash equivalents increased to C$373.6 million at the end of the second quarter from C$334.3 million in the year-ago quarter.
 
Total debt decreased to C$4.2 billion during the quarter from C$4.7 billion in the year-ago quarter. Debt-to-total capitalization ratio was 46.2%, down from 48.8% in the year-ago quarter. The low debt-to-total capitalization ratio implies that the company has enough liquidity in its balance sheet and is favorably positioned for long-term opportunities.
 
Dividend
 
On July 26, 2010, Canadian Pacific paid a quarterly dividend of 27 cents per share to shareholders of record on June 25, 2010.
 
Our Analysis
 
We believe Canadian Pacific will continue to benefit from its cash-rich balance sheet, low debt position, higher liquidity, stronger operating ratio, solid productivity gains, continued cost management and opportunities in bulk markets. However, the stock upside is limited to the rise in fuel prices, volatility of demand in some markets, competitive threats and highly unionized workforce.
 
Thus, we are currently maintaining our Neutral recommendation supported by our Zacks #3 (Hold) Rank.