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.
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.