Canadian Pacific Tops Estimates - Analyst Blog

Canadian Pacific Railway Limited (CP), Canada's second largest railway, reported adjusted earnings per share of C$1.12 ($1.11) in the fourth quarter, ahead of the Zacks Consensus Estimate of $1.09. Adjusted earnings leaped 51% year over year, thanks to lower tax rates and increased revenue generation.

For fiscal 2010, adjusted earnings shot up 54% to C$3.87 per share ($3.76 per share).

Revenues climbed 13% year over year to C$1.29 billion ($1.27 billion) on volume expansion, fuel surcharge revenues and strong pricing, but remained below the Zacks Consensus Estimate of $1.29 billion. Revenues for full-year 2010 also witnessed an increase of 13% to C$4.98 billion ($4.84 billion). The demand for rail service remains healthy across all business segments throughout the year.

Carloads (volume) grew 8.7% year over year in the fourth quarter as a result of a rise in volumes for all products except grain. Revenue ton miles, which measures the relative weight and distance of rail freight transported by Canadian Pacific, upped 13.9% from the year-ago quarter.

Operating income in the reported quarter increased substantially by 34% year over year to C$298.0 million ($294.2 million), attributable to sustained productivity and operating efficiency. For 2010, operating income rose 39% to C$1.12 billion ($1.09 billion).

Operating expenses grew 8.2% year over year in the fourth quarter. Operating ratio (defined as operating expenses as a percentage of revenue) expanded 360 bps year over year to 77.0% as a result of continued focus on maintaining asset efficiencies, safety measures and increased productivity.

In fiscal 2010, operating expenses rose 7.5% year over year with operating ratio improving 410 bps to 77.6% from 81.7% in 2009.

Liquidity

Canadian Pacific exited fiscal 2010 with cash and cash equivalents of C$360.6 million, down from C$679.1 million in the prior year. Long-term debt reduced to C$4.0 billion from C$4.1 billion in the prior year.

Dividend

Canadian Pacific will pay a quarterly dividend of 27 cents per share on January 31, 2011 to shareholders of record on December 31, 2010.

Guidance

For 2011, the company plans to invest C$950 million to C$1.05 billion in capital projects. Canadian Pacific expects the tax rate to be in the range of 24% to 26%.

Our Analysis

We believe high demand for each products group, long-term investments, and rising coal volumes resulting from an agreement with Teck Resources Limited (TCK) will lead to higher profitability in the future. Canadian Pacific remains on track to produce an operating ratio in the low 70s over the next three-to-five years.

This low operating ratio can be achieved through structural cost reductions, running longer and heavier trains equipped with distributed power, greater asset utilization as well as consolidating divisions, yards and shops. On the flip side, rising fuel prices, competitive threats, strong Canadian dollarand highly unionized workforce limit the upside to the stock.

Thus, we are currently maintaining our long-term Neutral recommendation on Canadian Pacific supported by the Zacks #3 Rank (Hold).

 
CDN PAC RLWY (CP): Free Stock Analysis Report
 
TECK RESOURCES (TCK): Free Stock Analysis Report
 
Zacks Investment Research