CP makes the RRs 2-for-2

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Greetings;

CP joins KSU in the Winner’s Circle:  Another day, another great result – but this level will be the exception - at least as far as the top line goes - not the rule, for the rail group in Q1/20.  CP’s great Q1 (1100bps drop in OR!) shows both what they can do during &  importantly AFTER C19.  But KSU &CP will be the outliers; tomorrow afternoon CSX will report followed on Thursday morning by UNP; these results (along with NSC and, eventually, BNSF will be more “representative” of the group, or perhaps a better word is “definitive”.  But of course, will volumes crashing, by Q2 they will all be in the same boat.  Will they all react the same?  Judging by the news just out from Union Pacific (“Seeking Alpha” reports top management pay cuts and unpaid leaves of absences for other ranks after 22% volume drop MTD – we’ll be able to confirm, etc, Thursday morning), maybe not….

 

Capex and clear long term strategic thinking will be one possible differentiator in the rails, although of course, I hope not!  The rails’ ability to think longer-term and to use their financial strength correctly is the biggest lever they have to come out of the pandemic even stronger than when they went in (which of course will not be true of all modes or industries).  So far, KSU and, especially, CP have demonstrated this, the best example being  CP’s strong defense of their $1.6B Capex Plan (whose even better defense is the 17.4% ROIC!).  When coupled with KSU sticking to 17% of (lower) revenues, it has been a good start for long term rail investors!

 

CP’s webcast showed a nice blend of yesterday (Q1), today (C19) and tomorrow:  The first  quarter highlights – and there were many, which we need to remind ourselves of as the economy approaches “normalcy” in (FILL IN THE BANK) months – include:

  • EPS (adj/FD) up 58% YOY and 9% above consensus.
  • Improvements in all 4 operational KPIs (dwell by 22%) and both key safety metrics, accidents/injuries by 39%/38%!
  • Revenues up 16% (we’ll miss that) on +9% volumes (ditto).
  • The OR – 59.2% - was the first “sub-60” Q1 for CP, the industry leader I expect  (the challenger coming tomorrow).
  • The ROIC – Nuff Ced.

 

What they will do during the pandemic:

  • CP didn’t suspend their Guidance but revised downward to flat EPS (the 2020 winner, I suspect albeit down from as much as low double-digit growth expected in January) on a mid-single reduction in volume (RTMs), helped by their 40% bulk base business and wins in autos and international intermodal that will mitigate the cyclical declines in those commodities and continuation of inflation+ pricing.
  • Stick to their proven PSR principals.  CP, along with their countrymen at CN and KSU, had given late quarter updates (again – kudos!) and noted then that PSR will show itself even more brilliantly in a slowdown, especially an acknowledged and expected volume decline.

o   The expected pattern is obvious, with Q2 being the low point then stability followed by recovery (into 2021).

o   Month-to-date RTMs are down ~10% - but train starts are down 15% and yard crew starts down 18% - yet velocity MTD is up 8% (it was up 2% in Q1/20).

o   There appear to be opportunities in fuel efficiency – one of the few metrics that went the “other way” (by 4%).

  • Stick with their $1.6B Capex Plan – with CFO Nadeem Velani noting that it was a “great time to stretch the Capex dollar (loonie) further” (editing was mine).

o   CP “paused” their share buyback program (40% completed; shares down 2% YOY) and held the dividend flat (to be revisited in “2H20.”

o   See FCF of ~$1B for 2020.

o   Yet still had to further defend this on the very second question in Q&A (from someone who knows better) on “contingency plans” to cut Capex and/or the dividend; Velani responded, “We don’t see any of that at-risk” and managed not to shout nor to laugh….

Also of note:

  • The CMQ – CEO Keith Creel predicted that 24 to 36 months after they take over operations (this spring?) they could take revenues from ~$40mm to ~$100mm+ - and achieve “CP margins”.    If true that makes for a pretty big win (I just hope that Searsport, Maine isn’t critical to all of that!).
  • Canadian Pacific is a hit!  I am, referring of course to the old-time (1949) movie with Randolph Scott and the future Mrs. Ronald Reagan, Jane Wyatt.  Filmed in “Cinecolor”, with an interesting mix of great Alberta scenes and obvious back lots; Calgary is represented as a Metis trading post.  No truth to the rumor that you can spot a young Nadeem Velani in the dynamite scene….if you can't find it, I would be happy to lend it to you….

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com 
1230 Park Avenue suite 4A NYC, NY 10128 
abh18@mindspring.com 
212.595.0457/ 917.520.7101 M

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