Canadian Manufacturing

CP on track with growth plan despite cutting crude forecasts

Calgary-based CP still expects to double earnings by 2018 despite cutting amount of crude it expects to carry

CALGARY—Canadian Pacific Railway Ltd. (CP) remains on track to double its earnings by 2018 even though low crude prices have forced the company to trim the number of carloads it expects to carry in 2015 by 30 per cent.

The Calgary-based railway said it expects to transport 140,000 carloads of crude this year, a significant increase from last year, but down from 200,000 in its prior forecast.

Crude has been one of the fastest growing commodities for Canadian railways as the construction of new pipelines has been mired in political uncertainty.

CP moved 110,000 carloads of light and heavy crude last year, up 22 per cent in one year, including 30,000 carloads in the fourth-quarter.

“There are a lot of moving parts here … but the bottom line of it is that we’re highly confident that in four years the EPS will be where we said it will be,” CEO Hunter Harrison said in a conference call after announcing record results.

While the growth of crude carloads will slow, Harrison noted it isn’t the highest margin business because of some older contracts.

CP, which has been under Harrison’s leadership since mid-2012, said last year’s results hit the company’s targets two years early, with revenues growing eight per cent to $6.62 billion and adjusted earnings rising 40 per cent to $8.50 per share.

In the fourth quarter, it generated a record $1.76 billion of revenues, while the operating ratio, which measures the efficiency of the railway network, reached a record low of 59.8 per cent.

“I’ve been doing this a long time and, all things in, this is the best quarter I have ever been associated with which, I think, sets the foundation for us going forward in our fiscal year plan and some of our guidance for next year,” Harrison told analysts.

The railway expects revenues will grow seven to eight per cent in 2015, adjusted EPS will increase more than 25 per cent from 2014’s level and the operating ratio will fall below 62 per cent from an already record low of 64.7 per cent for all of 2014.

Harrison, a former CEO of rival Canadian National Railway Co. (CN) who was hired out of retirement after activist investor Bill Ackman successfully campaigned to oust CP’s previous chief executive other key members of the board, said he doesn’t expect crude prices to stay depressed but said ongoing weakness will be offset by increases in the rest of the economy and improved efficiencies and cost controls.

CP said it earned $451 million or $2.63 per diluted share in its fourth quarter, up from $82 million or 47 cents per share a year ago when it was hit by a $435-million, one-time charge.

Revenue totalled $1.76 billion, up from $1.61 billion a year ago.

CP reported $460 million or $2.68 per share of adjusted earnings, which was up from $338 million, or $1.91 per share, in the fourth quarter 2013 and above analyst estimates of $2.57 per share on revenue of $1.732 billion.

For its full year, the railway said it earned $1.48 billion or $8.46 per diluted share, up from $875 million or $4.96 per diluted share a year ago.

Revenue for 2014 totalled $6.62 billion, up from $6.13 billion in 2013.

Analysts said the results were above expectations, with the guidance solid but conservative.

Benoit Poirier said the fourth-quarter results were driven mainly by a 10 per cent growth in grain shipments in the United States and Canada.

Domestic intermodal revenues increased 20 per cent, partially offsetting a 12 per cent decline in international intermodal resulting from the loss of a major contract.

Walter Spracklin of RBC Capital Markets said the revenue outlook was lower than the 10 per cent annual growth the railway outlined in October.

“Given that management also indicated that one-third of their 10 per cent growth would come from energy, this guidance may be incorporating some added conservatism on account of energy markets,” he wrote in a report.

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