EUR 850.00 For Business Accounts Only

Morningstar | Canadian Pacific Delivers Solid Second-Quarter Results Despite Interruptions During the Period

Labor actions interrupted Canadian Pacific’s service twice during the second quarter, but ratification of two related agreements are in progress this week. The rail grew its top line 7% year over year, even though management estimates that top-line growth was constrained 250 basis points due to labor interruptions. The operating ratio degraded 140 basis points from the prior-year period to 64.2%, in part due to fuel surcharge lag, and without labor disruptions, the OR likely would have been flat. We expect CP to improve its OR in the second half of the year, and we maintain our wide moat rating. As we update our valuation model, any increase to our fair value estimate will likely be upward and modest.

Among reported commodities, revenue from only two major classes declined from the prior-year period: Fertilizer revenue declined 18% on a short application season and plant outages, and coal declined a modest 1%. Other segments improved sales between 4% and 33% year over year, with energy, chemical, and plastics up the most. International intermodal grew an impressive 16%, but domestic was up only modestly. We were surprised that automotive revenue improved 21% given plateaued demand for North American light vehicles.

Crude by rail was up sharply this period. As we’ve made clear in the past, we consider this to be a short-lived, opportunistic product for rail, not a secular growth story (because pipeline remains the superior economic solution where adequate demand exists). Management indicates this opportunity may span two to five years, but more importantly, crude is opening new customer relationships with some shippers that may be well-located for CP’s services. We expect crude will likely drag on overall margins as it grows, but broad renewal pricing was “strong,” and same-store rates increased at the high end of the targeted 3%-4% range.