CP Rail Climbs as Investors Anticipate Forecast Will Get a Boost

(Bloomberg) -- Canadian Pacific Railway Ltd. jumped to a one-month high after signaling that continued strong demand for commodities could boost the carrier’s full-year targets.

Robust traffic for oil, chemicals and grain helped propel second-quarter revenue for Canada’s No. 2 railroad beyond analysts’ estimates. The company also won contracts to move sand and consumer cargo as rival Canadian National Railway Co. grappled with network bottlenecks.

While Canadian Pacific stuck to its goal of logging a mid-single-digit revenue increase this year, Chief Executive Officer Keith Creel opened the door to revisiting the target. Railroads throughout North America are gaining from strong freight demand and the chance to take market share from truckers, who are raising prices amid tight capacity.

Targets for 2018 have “potential upside in light of its strong volume growth prospects” in the second half, Benoit Poirier, an analyst at Desjardins Capital Markets, said in a note to clients Thursday. He raised his 12-month target on Canadian Pacific to C$274 from C$259.

“Management is taking a conservative stance on guidance despite positive results since the beginning of the year,” he said.

Creel said he preferred a “prudent approach” to adjusting forecasts. “Let’s get a little closer into the third quarter,” he said on a conference call Wednesday evening after the Calgary-based railroad posted earnings. “Let’s see what the grain crop is going to do.”

Shares Advance

Canadian Pacific rose 2.2 percent to C$254.40 at 10:32 a.m. Thursday in Toronto, after reaching C$256.11, its highest intraday since June 18. The shares had advanced 8.3 percent this year through Wednesday, while Canada’s benchmark S&P/TSX Composite Index gained 1.7 percent.

The railroad’s current forecast calls for adjusted earnings to advance “in the low-double digits” this year from C$11.39 a share in 2017. That implies profit of at least C$12.53, which is short of the C$13.26 average forecast of analyst estimates compiled by Bloomberg.

Canadian Pacific may use its investor day in October to boost its targets, Walter Spracklin, an analyst at RBC Capital Markets, said in a note.

Executives cited strong potash demand, new momentum in automobile shipments and healthy prospects for transporting crude oil, Steve Hansen, a Raymond James Ltd. analyst, said in a note to clients. “We like this setup for the second half of 2018 and 2019,” he said.

Strike Impact

Healthy traffic allowed the carrier to blunt the impact of a brief strike. More than 3,000 of the railroad’s conductors walked off the job in late May before union and company negotiators agreed on a new contract. Though the strike lasted only about a day, operations were affected longer as the company had to start winding down operations in anticipation.

Adjusted profit rose to C$3.16 a share in the second quarter, Canadian Pacific said in a statement, exceeding the C$3.09 estimated by analysts. Sales climbed 6.5 percent to C$1.75 billion ($1.33 billion), while analysts predicted C$1.73 billion.

Joint Venture

Earnings this year will probably get a lift from a recent agreement with Ocean Network Express, a joint venture between Asian shippers NYK Line, Mitsui OSK Lines and K Line, and a deal to carry sand for Smart Sand Inc. of the U.S. Adding the Ocean Network intermodal business is likely to contribute 14 cents to 16 cents to annual per-share profit in 2019, according to Bloomberg Intelligence estimates.

Operating ratio, an efficiency yardstick in which a lower number is better, deteriorated to 64.2 percent in the second quarter. That was 1.4 percentage points higher than a year earlier.

Without the strike, and the service interruptions that came with it, Canadian Pacific’s operating ratio probably wouldn’t have worsened compared with last year, Chief Financial Officer Nadeem Velani said on the conference call. The disruptions boosted costs and resulted in some lost sales, he said.

Energy, chemicals and plastics revenue jumped 29 percent to C$278 million in the second quarter. Grain, the biggest line of business at the Calgary-based company, advanced 2.5 percent to C$372 million. Intermodal sales climbed 6.5 percent to C$360 million.

Unlike Canadian National, Canadian Pacific has room to absorb new business in its network in the second half, said Dan Sherman, an analyst at Edward Jones.

“They have capacity, and that’s a good thing,” Sherman, who recommends buying the shares, said in an interview. “For the next three or four months, these guys are virtually going to be the only game in town.”

©2018 Bloomberg L.P.