Delayed grain harvest weighs on CP Rail’s profit
Railway’s earnings will recover when bumper crop is shipped: CEO
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 that 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 railway 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 railway’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, resulting in huge backlogs of grain. Farmers complained to the government, which implemented minimum grain-hauling requirements for the railways with fines for noncompliance.
Hunter Harrison, CEO of CP, is making a concerted effort this year to avoid similar problems, but the weather is conspiring against him.
“(Farmers complain) that the railroads always use this excuse about the weather and we shouldn’t be able to do that,” Harrison said in an interview. “Well, now we’re hearing from the farmers that they can’t get the grain because of rain.”
CP announced last week that it has created a “supply-chain scorecard,” which will track weekly grain movements and any problems that arise. Harrison hopes this will help take some of the pressure off the railways.
“Each year we go through this finger-pointing about who’s responsible and who dropped the ball and what did it cost,” Harrison said.
“I said, ‘Look, why don’t we create a report for everyone that’s transparent.’ ... If there’s some dispute about the facts or what’s in the report, it’s there in front of everybody and we can get after it right then, rather than months later.”
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.
“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.”