Canadian Pacific’s fourth-quarter and full-year 2015 financial results were slightly below analyst expectations yet “still solid given the macro challenges,” according to Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “While volumes should decline in 2016, the company guided for double-digit EPS growth. We are modeling for a more conservative mid-single increase. We remain constructive in the long term but note that near-term upside may be limited.”
CP reported adjusted 4Q15 EPS of C$2.72, slightly below Cowen’s and consensus estimates of C$2.79 and C$2.77, respectively. Operating income declined 4% year over year to C$677 million, also a short of Cowen’s and consensus expectations of C$718 million and C$725 million, respectively. Revenue also fell 4% to C$1.68 billion, compared to Cowen’s and the consensus estimate of C$1.72 billion. The decline occurred as volumes decreased 5.9% (all commodities except Canadian grain, fertilizer, and forest products, declined), while revenue per carload rose 1.8%. Negative fuel and traffic mix impacts were offset by currency and core price increases. Pricing came in at the low end of CP’s targeted 3% range. The pricing result in Cowen’s 4Q15 Rail Shipper Survey was 3.2%, marking a slight 20 basis points sequential decrease, the third consecutive one.
“While we would not rule out further price moderation given the current environment and somewhat limited service improvement upside from this point, CP and its Class I brethren should continue to garner compensatory rate increases as they have been able to do in past downturns,” Seidl says. “CP expressed its frustration at public remarks made by certain parties, particularly elected officials, in opposition to its proposed merger with Norfolk Southern. We note that opposition has also been expressed by railroads, many shippers, and other stakeholders. While CP does not appear ready to throw in the towel yet, we sensed that its conviction about the deal materializing may have been shaken somewhat.”
“Continued industrial headwinds are likely to result in another volume decline in 2016, and we have modeled for a 3% decrease, which may be a bit more negative than the 1-2% range to which the company appeared to hint,” notes Seidl. “Management remained confident that, even if current conditions persist, it can achieve double-digit EPS growth. We have taken a more conservative perspective, forecasting 5% earnings growth. The growth is likely to be driven by a continued focus on improving operating metrics, a modestly reduced headcount, and a more nimble approach to pricing, by which CP may target certain incremental business at lower rates if that would have a favorable impact on overall earnings.”
Cowen has revised its estimates and lowered its target for CP, yet is maintaining its Outperform rating. Says Seidl: “CP continues to deliver on its operational plan despite a more challenging macro environment. The oil price decline has slowed crude shipments, but it is helping CP and its rail brethren in their efforts to manage costs in the face of lower volumes. We are lowering our 2016 EPS estimate to C$10.60 (US$7.63), from C$10.90 (US$8.18), in order to reflect a weaker volume environment, partly offset by cost management and operational improvements. We are also introducing our 2017 EPS estimate of C$11.90 (US$8.92).”
Bottom line: “CP is still a good play for patient investors.”
