Canadian Pacific Keith Creel. Source: Globe And Mail
Canadian Pacific (CP) reports earnings Oct. 28. Analysts expect revenue of $1.4 billion and EPS of $3.23. The revenue estimate implies a Y/Y revenue decline in the mid-single-digit percentage range. Investors should focus on the following key items.
Falling Rail Traffic
In 2019 railroads faced headwinds to their top lines. The pandemic has exacerbated the situation and business activity has free fallen. For the first 39 weeks of 2020, cumulative rail traffic for Canadian railroads was down 7.7%. Last quarter, Canadian Pacific’s rail traffic fell 14% Y/Y and its average selling price (“ASP”) rose over 5%. Over half of the company’s major product segments experienced revenue declines.
On a combined basis, Grain, Energy and Intermodal represented more than 65% of total revenue. Grain revenue was up 6% on a 5% rise in carloads and 1% rise in ASP. Lower Grain volumes in the U.S. partially offset record Grain volumes in Canada during the quarter. Revenue from the Energy, Chemicals, Plastics segment fell 1% on a 28% decline in carloads and 37% increase in ASP. COVID-19 triggered lower demand for crude and liquefied petroleum. Intermodal revenue was off 10% on a 5% decline in carloads and 5% decline in ASP. The segment should ebb and flow with the vagaries of the global economy.
Canadian Pacific’s carloads fell 14% Y/Y. Only three of its major product categories experienced increases in volume.
Carloads for Grain rose in the low-single-digit percentage range on the strength of volume in Canada. Intermodal volume fell 5% Y/Y and I expect it to face long-term headwinds. Intermodal represented more than 40% of the company’s total carloads, so its performance will likely have an outsized impact on Canadian Pacific’s total volume.
The company hiked prices 5%, a sharp departure from competitors