3 Takeaways From Canadian Pacific's Earnings Release

A record-setting financial and operational performance may not do much for this expensive stock.

Jan 30, 2014 at 6:45PM

Everyone loves a train ride. And when Canadian Pacific (NYSE:CP) released its earnings on Wednesday, investors were looking for assurances that their very profitable journey would continue into 2014, and beyond. The market liked what it heard, pushing the stock 4% higher on the day. Here is what Canadian Pacific said about its performance in 2013, and what investors can expect over the next four quarters.   

A record low operating ratio
Canadian Pacific is making steady progress driving down its operating ratio, a measure of the amount of revenue required to run the railway. A low operating ratio is important because it allows more revenue to flow to the bottom line as profit, and gives the company added flexibility to be competitive in terms of pricing with competitors, and secure strategic customers.

Canadian Pacific achieved an adjusted operating ratio of 69.9% for 2013, a 7.1 percentage point improvement over 2012, and an all-time record for the company. In comparison, industry leader Canadian National (NYSE:CNI) reported an operating ratio of just under 60% for the third-quarter of 2013. Canadian Pacific also confirmed its on track to achieving the goal of a 65% operating ratio by 2016. Canadian Pacific may experience some short-term setbacks in lowering its operating ratio from quarter to quarter, maybe as soon as the first-quarter of this year due to severe weather affecting much of central Canada and the Midwest. Regardless, Canadian Pacific is clearly moving in the right direction.

Improved productivity across the board
Canadian Pacific is delivering on its strategy of delivering more with less, and driving increased productivity in all areas. 

Locomotive productivity, measured by gross ton miles per active horsepower, improved 13% during the fourth quarter, and is better by 20% for 2013. Concurrently, the workforce was reduced by 11% in 2013. That's all well and good, but as I noted in a previous article, delivering more with less can't come at the expense of safety. For 2013, train accidents per million train miles, as defined by the Federal Railroad Administration, increased 7%. Canadian Pacific's management highlighted improvements made during the fourth-quarter, but the full-year trend remains a concern.  

Revenue met, earnings missed 
Canadian Pacific delivered $1.6 billion in revenue during the fourth quarter, and reported full-year revenue of $6.1 billion, an 8% improvement over 2012. This annual revenue figure is another record for Canadian Pacific, and consistent with their guidance and analysts' expectations. 

Probably the most closely watched, eagerly anticipated figure was Canadian Pacific's adjusted earnings per share. They delivered EPS of $6.42, an impressive increase of 48% over 2012, and in line with earlier guidance. However, it was a miss, with analysts' expecting $6.51 per share, or a 51% growth year over year. Despite the shortfall, the stock rose significantly on the day primarily due to the upbeat guidance provided for 2014.

A positive outlook
Stock markets are very much about the future, and this is where Canadian Pacific provided the greatest assurances to investors. For 2014, Canadian Pacific forecasts revenue growth of 6%-7%, adjusted EPS of 30% or greater, and an operating ratio of 65% or better. All figures conform with what analysts were expecting, and must be achieved to support the current, lofty stock price. 

In conclusion
Despite the steady progress over 2013, and the reassuring guidance given for 2014, Canadian Pacific's stock is significantly more expensive than its peers trading at a price-to-earnings ratio of 31.5. For Canadian Pacific to continue delivering market-beating returns, it will need to beat its own guidance, and outperform market expectations over the next few years. 

It's no secret that investors tend to be impatient with the market...
...but the best investment strategy is to buy shares in solid businesses like railroads and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Justin Lacey has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information