Not all railroads are alike. Heck, not even all Canadian railroads are identical, as CanadianPacific Railway's (NYSE:CP) earnings report would indicate. That said, a rising tide usually does lift all boats. er, railcars.
Revenue for the first quarter climbed 14% to about $827 million. Revenue ton-miles were up 4% in the quarter and carloads were down 1.4%. However, an impressive 16% improvement in yield (that is, revenue per car) drove the top line.
CP also managed to improve its operating efficiency. Despite a 35% increase in fuel costs, the company's operating ratio improved to 82.4% (a 4.5% improvement) and operating profit grew 54% on a year-over-year basis.
In comparison to fellow Canadian rail operator Canadian National (NYSE:CNI), CP hauls quite a bit more coal, grain, and industrial products -- and relatively less metal/minerals and petroleum. Granted, Canadian National hauls about double the number of carloads of CP, so these are more relative than absolute comparisons.
In an important boost to the coal business, CP resolved a dispute with the Elk Valley Coal Partnership and signed a five-year contract retroactive to last year that includes a freight rate increase. As EVCP is one of the largest producers of metallurgical coal in the world, this is clearly an important customer for CP.
CP has a somewhat high operating ratio (that's operating expenses as a percentage of revenue -- so, remember, higher is bad), but management continues to make progress with improved efficiency efforts. New multiyear contracts are in place with most of its union workers, and compensation/benefit expense increased only 7% on an annual basis.
What's more, CP has made a concerted effort to manage fuel costs, including both fuel surcharges and active hedging efforts that cover about one-third of the year's fuel needs at a price that is presently quite favorable. Management also continues to be more selective with its freight operations and has moved away from less desirable freight.
These are certainly good times for railroads, and CP has gone along for the ride. While CP doesn't quite match up to Canadian National on an operations or valuation basis, the company more than stands out in comparison to the railroad industry in general. The company still has room to improve its margins, and those improvements should drop almost directly to the bottom line.
CP might not be my favorite idea in railroads, but that doesn't make it a bad company or stock by any means. What's more, if the coal market stays hot and the grain harvest is as good as some expect, the company should have no trouble meeting its revenue guidance.
More commentary and articles on the railroad industry:
- Still Looney for the Rails
- Iron Horses Keep Galloping
- Genesee Rides Smooth Rails
- Guangshen Railway to Double Capacity
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
