Delayed grain harvest hits CP

Revenues fall, earnings growth forecast reduced

Wet weather on the Prairies is keeping grain in the fields and weighing on Canadian Pacific Railway Ltd.’s results, but the company is optimistic farmers will eventually harvest a bumper crop.

The trick then will be moving it to markets.

CP said Wednesday that thirdquarter revenue fell nine per cent to $1.55 billion, due largely to a nine per cent drop in Canadian grain volumes.

The railroad also cut its full-year forecast to mid-single-digit growth in earnings per share from doubledigit growth, blaming the delayed grain harvest, a relentless plunge in crude volumes and “persistent economic challenges compounded by a strengthening Canadian dollar.”

Despite the weakness, the railroad’s cost-cutting efforts allowed it to post its lowest-to-date operating ratio — an important measure of efficiency in which a smaller number is better — of 57.7 per cent. Net income rose seven per cent to $347 million or $2.73 on an adjusted-earnings-per-share basis. This was below the $2.79 forecast by analysts.

CP’s shares fell slightly on Wednesday, but National Bank analyst Cameron Doerksen said he still favours the stock “due to its proportionally larger exposure to grain, which we expect will drive solid volume and revenue growth through early 2017.”

More than almost any other commodity, grain has been an ongoing source of drama for the railways. Three years ago, a record harvest combined with a terrible winter resulted in huge backlogs of grain. Farmers complained to the government, which implemented minimum grain-hauling requirements for the railroads with fines for noncompliance.

The delays in this year’s grain harvest are expected to push volumes and revenue into later quarters.

“If the grain does move (in the) fourth quarter, it’ll carry over into the first quarter of ’17 and gives us an even stronger start there,” Harrison said on a conference call with analysts.

“It’s not lost revenue, it’s just revenue that’s pushed forward,” agreed Keith Creel, CP’s chief operating officer and Harrison’s designated successor.

“Barring a horrific winter, which I pray about every night, I think we can have modest volume growth in ’17 with a much improved operating base, and you’re going to see some earnings growth in ’17.”

Chief financial offer Nadeem Velani said he expects CP’s operating ratio to fall to the mid-50s, excluding land sales, by the end of the fourth quarter. This is down from the low 80s when Harrison took the helm of CP in 2012.

Velani was appointed chief financial officer Wednesday after filling the role on an interim basis since former CFO Mark Erceg stepped down last month.

Barring a horrific winter, which I pray about every night, I think we can have modest volume growth in ’17 with a much improved operating base.