DECLINING FREIGHT VOLUMES TAKE THEIR TOLL ON CP RAIL.
Railway issues second-quarter profit warning
The dramatic decline in freight volumes is taking its toll on Canadian Pacific Railway Ltd., which took the unusual step Tuesday of warning that its second-quarter results will come in significantly below expectations.
CP’s volumes, measured in revenue ton miles, are down 12 per cent so far this quarter amid broad- based industry weakness, according to RBC Capital Markets.
The railway said it was dealt a particularly heavy blow by l ower- t han- e x - pected volumes of bulk commodities such as grain and potash, as well as the wildfires in northern Alberta and a strengthening loonie.
As a result, CP now expects second- quarter revenue to decline 12 per cent from a year ago, adjusted earnings per share to fall to $ 2 and operating ratio to come in at 62 per cent. Analysts had expected revenue to fall about six per cent and earnings per share to come in at $ 2.45. The operating ratio — a key measure of efficiency, in which a lower number is better — would be 1.1 percentage points higher than a year ago.
CP’s shares fell as much as 4.2 per cent in early trading. They closed at $ 159.30, down $ 3.80 or 2.3 per cent on the day. The company will release its final secondquarter results on July 20.
Despite the unforeseen weakness in t he second quarter, the railway said the impacts are “transitory” and it is still capable of achieving its forecast of doubledigit growth in full- year earnings per share.
“CP will continue to focus on controlling costs in a difficult environment,” CEO Hunter Harrison said in a statement. “While we acknowledge the environment remains challenging, additional cost-reduction opportunities and the potential for stronger volumes in the back half of the year still lead us to believe that achieving double- digit EPS growth in 2016 is a possibility.”
CP is not alone: All the North American railways have been battered by weak freight volumes, with commodities like coal and metals leading the way. The only commodity that saw volumes rise in the month of May was forest products, according to National Bank analyst Cameron Doerksen.
The decline in commodity volumes was not unexpected given the weak pricing environment, but more concerning is the recent decline in intermodal traffic, which tends to be more reflective of consumer demand.
“Through much of 2014 and 2015 one persistent area of strength for the Canadian rails was intermodal,” Doerksen wrote in a note to clients.
“However, in recent months intermodal carloads have turned negative, which is cause for concern given intermodal is often viewed as an indicator of the broader economy.”
He added that automotive — another historic point of strength for the Canadian rails — may have peaked. On the bright side, the Canadian grain crop l ooks strong, which could boost volumes once it’s harvested later this year.
Doerksen l owered his price target for CP to $ 194 from $ 199 and reduced his target for Canadian National Railway Co. to $ 78 from $80.
The weak earnings outlook was “not totally unexpected” given management’s cautious comments during recent presentations and a 14- per- cent drop in the stock since first- quarter results were released, said Benoit Poirier, who follows the railways for Desjardins Capital Markets.
“However, we expect the Street to remain skeptical about CP’s ability to achieve its 2016 guidance in light of the lack of visibility on a volume recovery in (the second half of the year),” Poirier wrote in an analysis.
He added that he does not expect a similar warning from CN, as it already lowered its 2016 guidance last quarter and its secondquarter volumes have largely been in line with expectations.
Both CP and CN have said they expect the second quarter to be the most difficult of the year.
SKEPTICAL ABOUT CP’S ABILITY TO ACHIEVE ITS 2016 GUIDANCE.