Morningstar | Canadian Pacific Reaches All-Time Record Operating Ratio Coupled with Strong 19% Top Line Growth
Canadian Pacific grew third-quarter revenue by an impressive 19% to a reach a record CAD 1.9 billion top line. The rail increased revenue in every major commodity category, with greater than 19% year-over-year growth in potash, fertilizer, energy/chemicals/plastics, automotive, and intermodal sales. We’re maintaining our wide moat rating and are increasing our fair value estimate as we incorporate 2018 growth greater than we anticipated, and project operating ratios stronger than we previously modeled.The quarter’s 58.3% OR marks a 270 basis point improvement and an all-time CP record. CP achieved this in part due to building record train lengths and producing record fuel efficiency. What’s more, the quarter’s OR overcame a 250 basis point headwind from fuel price increases and stock and incentive compensation. No land sales improved the OR.
Pricing works a wonder, and CP indicated it increased same-store pricing in the middle of its 3%-4% target, with new renewals exceeding 4% for domestic carload business like merchandise, energy, chemical, plastics, and domestic intermodal. Long-term bulk commitments are half the business and they renewed at 1.5%-3% increases. This pricing is in line with our long run projection of 3% on carload and 2% on intermodal.
Within intermodal, which we expect to be the sole source of secular volume growth, CP improved revenue ton miles more than unit growth due to the termination of some short-haul business. Also, notably, intermodal average revenue per car improved 15% from the prior-year period due to constrained truck capacity in North America and greater fuel surcharges. CEO Keith Creel and his predecessor, Hunter Harrison, have maintained all along when its house was in order CP would win intermodal business, and this is coming to fruition at dramatically improved rates. It also seems to us that management is electing to forego business it considers insufficiently remunerative--we expect this discipline to be a CP hallmark.
Canadian Pacific Railway operates a transcontinental railway in Canada and the U.S. Co.'s business mix includes bulk commodities, merchandise freight and intermodal traffic, serving the principal business centers of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. As of Dec 31 2016, Co. operated on a network of approximately 12,400 miles of track, of which CP owns 10,800 miles and has access to 1,600 miles under trackage rights and lease agreements. Of the total mileage operated, about 5,600 miles were located in western Canada, 2,000 miles in eastern Canada, 4,400 miles in the U.S. Midwest and 400 miles in the U.S. Northeast.
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