Take Off! Big Kerfuffle in Cowtown, eh?! CP's Q1/19 EPS Miss

April 26, 2019

Greetings;

Just a refresher, from the Canadian Slang Dictionary:  “Take off” means “to express disbelief in what was said, ‘get out of here!’”

Greetings – Canadian Pacific is no hoser, eh (meaning “loser”, or the losing hockey team that has to “hose down the ice” pre-Zamboni).  But….after seeing their first quarter results….all I could think was….Take off, eh!  This also means that….

The rail winning streak is broken.  I (we) didn’t see this coming, although perhaps we should’ve – CP’s Q1/19 results came in some 5-7% below Streets (Wall & Bay) consensus and their OR increased by 180bps as severe February weather knocked even this cold-weather warrior for a loop (and, tragically, led the three fatalities).  But like UNP before them they have fully reiterated their FY Guidance issues in January - said CFO Velani:  “We can absorb this difficult first quarter and still over-achieve (for the full year)”.  But this breaks this quarter’s rail hit streak at 3 (it sure appears that NSC this morning posted a big W, bring the scoreboard to 4-1 so far in the quarter; details, in my usual +24 style, tomorrow).

Weatherin’ – the weather was, as CEO Keith Creel noted, “extraordinary”.  The personal injury rate (not in the slides) was up 25%, the train accident rate fully 36% (ditto) - leading to a an increase of about $50mm in casualty expense (located in “purchased services” along with snow removal, flood protection, etc).  Again, Velani – “without (the unusually rough February weather), volumes would have been on the guidance plan and the OR in the mid-60s) rather than the reported 69.3%. 

The “Beauty” way to go!  As winter finally breaks in the Great White North, CP sees blue skies ahead….Or, really, a restoration of their growth/productivity pattern from H2/18.  January revenues were tracking up ~14% and by late March it seems that CP had restored that level of growth (April-to-date volumes up 6%, revenues by 15% - with only a little bit of both representing catching up on deferred business).  Looking forward, Velani sees the OR “starting with a five-handle” for each of the three remaining quarters – and CP fully reiterated their FY guidance (mid single digit volume – RTM – growth and double digit EPS gains).  This, starting from -1% (RTMs)/-2% (units, my preference) traffic level, and a +3% adjusted EPS growth rate.  It’s coming form a lot of car-load sources, and without a near-term boost from CBR, still shuffling a bit in the $10/spread environment (CMO Brooks felt that situation will change perhaps by H2/19 and that CBR remained a positive ~3-year opportunity, one unaffected by the Alberta elections).  Pricing is solid (at the upper end of their +3-4% range).  New plastics opportunities are opening up near the feedstock generation in Alberta, with one new customer (IPL) using CP land to create a rail served terminal.

Some further thoughts upon reflection:

  • Not enough data!  Six slides?  No weather impact (explicit) break-out, no operational data….

  • I don’t know how to compare bad weather experiences (especially without data), but, on the surface, anyway, it sure seems like the new (to PSR) boy, UNP, sure handled their weather with more aplomb, didn’t it?

  • Keith Creel still thinks there will be consolidation “because the industry will run out of capacity”.  I know that he is an actor in the drama (and I am merely an observer), but I don’t buy it (as I wrote about in the UP/KSU piece yesterday).  Given that the rails are (mostly) all converting to PSR, and just beginning to look at the benefits of PTC (especially on capacity), and with the increased free cash flow generation (and the PHR view of Capex, as CNI will discuss next week), I don’t see that capacity shortage coming in our lifetime, if ever.  And, of course, the “pro-competitive” risks to offset any such gains in capacity are huge.  This is why Matt Rose has gone from being such a leading advocate of KC’s position to his current one….

  • When asked about CN’s “supply-chain extension M&A” (described here simply as “non-rail”). KC said something interesting to the effect of CP is at a different life-cycle phase (than CN), with newly created capacity throughout their network (thanks to PSR) that they can/need to fill; CP expect s to be inward looking, in this respect, for the next 3-4 years, at least….

Canadian Pacific management’s confidence came though loud & clear - although confidence plus data would be even more reassuring….Next up in Norfolk Southern, already a winner on the tape; lets see what the data tells us.  Meanwhile, look to the future, and sing!

Take Off!  To the great White North!
It’s the Beauty Way to go!

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com