CP is now as efficient as CN

Canadian Pacific Railway has caught up to rival Canadian National Railway when it comes to its operating ratio. CN now expects to earn no more than last year. CP’s share buy backs should keep its earnings per share growing. Both railway stocks remain buys.

Montreal-based Key stock Canadian National Railway is among the most efficient railways in North America. Under former leader E. Hunter Harrison, CN’s operating (or operating expenses to revenue) ratio improved greatly. In the first quarter of 2016, it improved to 58.94 per cent. That is, it cost just $58.94 to generate $100 of revenue.

Calgary-based Canadian Pacific Railway, another of our Key stocks, was among the least efficient railways. That’s why we urged you to support Mr. Bill Ackman’s replacement of CP’s management. He installed Mr. Harrison as its chief executive officer. Now CP is essentially as efficient as CN. In the first quarter, its operating expense ratio improved to 58.96 per cent.

In both cases, the railways generated less revenue in the first quarter. CN’s revenue slipped by four per cent to $2.964 billion. CP’s revenue also declined by four per cent to $1.591 billion. Both railways cited reduced volumes of shipments.

Operating costs fell far more than revenue

On the positive side, both railways cut their costs much more. CN’s operating costs fell by 14 per cent, to $1.747 billion. CP’s operating costs went down by nearly 11 per cent, to $938 million. Mr. Harrison said, “Despite weakness in the economy and volume headwinds, we focused on what we can control—our costs and our commitment to providing reliable service—and delivered a record performance.”

Unfortunately, CN issued a profit warning. It writes: “Weaker than expected freight demand in certain markets and the strengthening of the Canadian relative to the U.S. dollar have prompted a downward revision to CN’s 2016 financial outlook.” Less freight demand, of course, hurts revenue. And U.S. dollar revenue turns into fewer loonies.

The U.S. dollar is down

The U.S. dollar has risen against most other currencies in recent years. But Since February, the U.S. dollar has declined. Besides the loonie, it’s also down against the Japanese yen, the Euro and the British pound, among others.

The lower dollar will lift the profits of U.S. multi-nationals. It’ll cut the profits of Canadian companies, like CN and CP, which earn a lot of revenue in U.S. dollars.

CN now expects its 2016 earnings to come in at $4.44 a share. That’s unchanged from last year’s adjusted earnings per share. From a longer-term perspective, however, we expect CN to carry more container traffic from Prince Rupert.

CP did not issue a profit warning. That’s likely because it will buy back up to 6.91 million of its shares this year. In the year to March 17, the railway repurchased 11,375,189 shares. Spreading the earnings over fewer shares raises the earnings per share. CP also raised its dividend for the first time since 2013.

CN remains a buy for long-term share price gains and rising dividends. So does CP.


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

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