3 Things to Look for in Canadian Pacific's Earnings

Canadian Pacific (NYSE: CP  ) releases its fourth-quarter results on Wednesday, and investors should pay close attention. They will soon know whether Canadian Pacific can continue delivering for investors, or if a train wreck is just around the corner?

U.S. equity investors were rewarded nicely in 2013 with the S&P 500 index up 30%. However, investors in North America's leading railroads did even better. CSX (NYSE: CSX  ) rose 43%, Norfolk Southern (NYSE: NSC  ) climbed 47% and Canadian Pacific delivered shareholders a 43% return on their investment.

Today, Canadian Pacific's stock is priced for earnings perfection. It's trailing-12-month, price-to-earnings ratio is over 30, but on a forward earnings basis, the same figure is around 17.Clearly the market is expecting strong earnings growth over the next year, and into 2015.

Investors had a lot to cheer about last quarter. During the third-quarter revenue rose 6%, operating expenses fell 6%, and EPS grew 45%. The results were impressive, but the market expects even more this quarter. Which signals will indicate that CEO Hunter Harrison and the rest of Canadian Pacific's management team are on the rack track? When the company releases its fourth-quarter results, here is what to look for.

Lower operating ratio
At the end of 2012, Canadian Pacific's operating ratio -- how much of its revenue goes toward funding its operations -- was 77%. At that time, the company announced its aim to reduce that figure to 65% by 2015. That's an incredible, some say impossible, objective. It took Harrison 12 years to accomplish a similar task when his was CEO at Canadian National, reducing its operating ratio from 77.3% in 1997 to 66.7% in 2009.

But Harrison and his team at Canadian Pacific delivered the goods in the third quarter. They achieved an operating ratio of 65.9%, an astounding 8.2 percentage point improvement over the same period in 2012. When Canadian Pacific releases its fourth-quarter results, investors should be looking for continued improvement in its operating ratio, and hopefully be reassured that progress made to date is sustainable for the long term.

Improved productivity
Deliver more with less -- that about sums up Canadian Pacific's strategy for increasing shareholder value. Locomotive productivity, measured by gross ton miles per active horsepower, improved 22% last quarter. At the same time, total workforce fell by 18%. Impressive, but delivering more with less can't come at the expense of safety, particularly for a railroad. So far this year, train accidents per million train miles, as measured by the Federal Railroad Administration, increased 14% at Canadian Pacific. This is a concern, and investors should be listening closely to what management has to say, and whether this trend continued into the fourth quarter.

Meeting revenue and earnings expectations
As a forward-looking instrument, stock markets are all about expectations. Canadian Pacific forecasts 2013 revenue growth to be in the high single digits and earnings-per-share growth in excess of 40%. Both objectives look well within reach, but the average earnings estimate among analysts calls for $1.96 per share in the fourth quarter and $6.51 for 2013. That equates to a 51% growth in EPS for 2013. For the stock to support its current valuation, Canadian Pacific needs to surpass its own forecast, and deliver against market expectations. If it doesn't, the share price will suffer.

It's been a great ride for Canadian Pacific shareholders. When its latest quarterly results are released on Wednesday, investors should have a good idea whether to stay aboard, or get off at the next station.   

Secure your future with these great dividend stocks
Railroad stocks offer great dividends. And one of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2811855, ~/Articles/ArticleHandler.aspx, 8/29/2015 2:13:19 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Justin K Lacey

Professional Marketer by day. Financial Analyst by night. Soon to be Certified Financial Planner (CFP). I invest every spare moment trying to understand a company's strengths, weaknesses, and where the opportunities are for future success. My aim is inform, educate and share; to spread a few “capital ideas”.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
CP $146.16 Up +2.11 +1.46%
Canadian Pacific R… CAPS Rating: ****
CNI $55.65 Up +0.12 +0.22%
Canadian National… CAPS Rating: *****
CSX $27.80 Up +0.31 +1.13%
CSX CAPS Rating: ****
NSC $79.20 Up +1.28 +1.64%
Norfolk Southern C… CAPS Rating: *****