3 Things to Look for in Canadian Pacific's Earnings

With its stock priced to perfection,Canadian Pacific's fourth-quarter results need to impress

Jan 28, 2014 at 7:00PM

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 (NASDAQ: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.

Justin Lacey has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. The Motley Fool owns shares of CSX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers