CP railway stock a buy as it sets new records

Canadian Pacific Railway earned record-high earnings per share in 2015. It expects its earnings per share to grow by double digits in 2016. This Canadian railway stock remains a buy mostly for long-term share price gains. That’s because it has failed to raise its dividends.

We regularly examine Calgary-based Canadian Pacific Railway, or CP (TSX─CP; NYSE─CP). Since our Sept. 11, 2015 issue, this railway stock’s share price has fallen by 14.2 per cent. That’s partly because it earned 10 cents a share less then expected. Despite its share price drop, CP remains a buy. In 2015, it achieved record-high earnings per share and a record-low operating ratio. This year the railroad expects to set new record results. That’s why it remains a buy for long-term share price gains and small, flat, dividends.

In 2015, CP earned $10.10 a share, excluding one-time items in both years. This was up by 18.8 per cent from $8.50 a share, the year before. Its revenue rose by 1.4 per cent, to a record $6.712 billion. Freight revenue for forest products, fertilizers & sulphur plus chemicals & plastics jumped by 21, 16 and 11 per cent, respectively. This offset a drop in freight revenue for crude plus metals, minerals & consumer products of 19 and 10 per cent, respectively.

At the same time, CP’s operating expenses fell by 4.4 per cent, to $4.092 billion, excluding a one-time gain of $68 million. The cost of fuel plummeted by over 32 per cent, to $708 million.

In 2015, CP bought back and cancelled 13.7 million of its shares. This was only slightly offset by the issuance of 0.6 million shares under stock option plans. Spreading the earnings over fewer shares further raises the earnings per share, of course.

Record operating ratio for this Canadian railway stock

CP improved its operating (or operating-costs-to-revenue) ratio again. In 2015, it achieved a record-low full year operating ratio of 61 per cent. This beat last year’s record operating ratio of 64.7 per cent.

Chief executive officer E. Hunter Harrison said, “Despite challenging economic conditions and lower commodity prices, we continue to focus on what we can control—lowering costs, creating efficiencies and improving service.” Indeed, CP plans to cut 1,000 jobs this year.

Mr. Harrison is upbeat about CP’s outlook. He said, “While the North American economy braces itself for more headwinds, we remain optimistic about the future and CP’s continued growth. Despite the challenges, we expect 2016 to bring an operating ratio below 59 while double-digit EPS [Earning Per Share] growth.”

That is, CP plans to improve its operating ratio by two percentage points this year. This is moving it into the ranks of the lower-cost railroad stocks.

This Canadian railway stock should earn $11.50 a share in 2016

In 2016, we expect CP to earn about $11.50 a share, up by 13.9 per cent. This meets its “double digit” goal. The railroad stock plans to keep buying back shares.

This year, CP plans to make capital expenditures of about $1.1 billion. It can afford to do so. In 2015, the railroad generated cash flow of $2.184 billion. This comfortably exceeded last year’s net investment of $1.123 billion and dividends of $226 million. With earnings rising in 2016, CP’s cash flow should rise too. But lower cash flow last year fails to confirm the railway’s higher 2015 earnings per share.

CP describes itself as “a transcontinental railway in Canada and the United States”. Sales and earnings in U.S. dollars turn into many more loonies these days. That’s only partly offset by costs in U.S. dollars, such as fuel. With the loonie continuing to fall, the railroad’s foreign exchange earnings should improve in 2016.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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