It has been about a month since the last earnings report for Canadian Pacific (CP). Shares have added about 6.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Canadian Pacific due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Q3 Earnings Miss at Canadian Pacific
Canadian Pacific’s third-quarter 2020 earnings (excluding 22 cents from non-recurring items) of $3.09 (C$4.12) per share missed the Zacks Consensus Estimate of $3.22. Quarterly earnings also declined year over year.
Quarterly revenues of $1,398.3 million (C$1,863 million) also lagged the Zacks Consensus Estimate of $1421.8 million. The top line decreased year over year due to drop in freight revenues amid coronavirus-related woes.
Freight revenues, contributing 97.7% to the top line, fell 5.7% on a year-over-year basis. The company’s freight segment consists of Grain (up 11.7%), Coal (down 29%), Potash (up 12.8%), Fertilizers and sulphur (down 1.5%), Forest products (up 9%), Energy, chemicals and plastics (down 16%), Metals, minerals and consumer products (down 24.4%), Automotive (up 8%), and Intermodal (down 5.9%). In the reported quarter, total freight revenues per revenue ton-miles (RTMs) were up 1% year over year. Also, total freight revenues per carload climbed 2% from the year-ago quarter’s reported figure.
Operating income declined 10.3% in the quarter under review. Operating expenses decreased 2.3% year over year. However, operating ratio (operating expenses as a percentage of revenues on an adjusted basis) deteriorated to 58.2% in the third quarter from 56.1% in the year-ago quarter. Notably, lower value of this key metric bodes well.
The company exited the third quarter with cash and cash equivalents of C$183 million compared with C$133 million at the end of December 2019. Long-term debt amounted to C$8,945 million compared with C$8,158 million at the end of December 2019.
Canadian Pacific’s board approved a quarterly cash dividend of C$0.95 per share, payable to shareholders on Jan 25, 2021, of record as of Dec 31, 2020.
2020 Outlook Revised
With volumes gradually improving, Canadian Pacific anticipates revenue ton-miles to decline in low-single digit in 2020 compared to the year-ago period. Previously, the company expected the same to decrease in mid-single digit. Additionally, adjusted earnings per share are estimated to increase at least in mid-single digits from C$16.44 reported in 2019. The company maintains its expectation for 2020 capital expenditures at C$1.6 billion. Effective tax rate is estimated to be approximately 24.8% in the current year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.25% due to these changes.
At this time, Canadian Pacific has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Canadian Pacific has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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