Canadian Pacific looks for new direction after failed M&A spree

These are challenging times for management and shareholders of Canadian Pacific.

Its stock has continued to suffer following its failed attempt to acquire Norfolk Southern – a move engineered by activist investor and CP shareholder Bill Ackman – and is likely to remain under pressure for some time.

Not only did the CP-NS tie-up not go through, due to disagreements over price and significant regulatory hurdles, but Mr Ackman then trimmed his stake to 6.4% from 9.1% soon after CP’s advances were rejected in April.

This was bad news for the share price, and it continues to look for direction after a difficult year. Its two-year performance reads a 30% decline, and the current valuation implies a lowly 13x forward P/E multiple, which could be attributed to challenging trading conditions and a less attractive yield (forecast at 1.1% in 2016) than that of its rivals.

Since the NS deal was abandoned, first-quarter results offered little relief to shareholders, although second-quarter results due in late July could provide more clarity about the group’s underlying performance and cash flows.

Revenues fell 4% in the first quarter, with reported sales from US grain, coal, potash and other commodities being impacted the most, although data for revenues per ton-miles was more encouraging.

“Freight revenues were C$1,548m in the first quarter of 2016, a decrease of C$82m, or 5% from C$1,630m in the same period of 2015.”

That drop was primarily due to the impact of lower fuel prices on fuel surcharge revenue of $82m and a decline in traffic volumes, and were partially offset by a favourable impact of currency movements of C$107m.

Non-freight revenues were only C$43m, up 23% from $35m year-on-year. The increase was primarily due to higher transload revenues following the acquisition of Steelcare in the third quarter of 2015, leasing and switching revenues, CP said. The favourable impact of the change in currency exchange accounted for $1m of the increase, the group added.

Despite a fall in revenue, CP clearly benefited from a lower cost base.

Fuel costs have been much lower this year, down 36% year-on-year to C$125m in the first quarter, but CP also benefited from falling compensation and benefits costs as well as lower purchased costs, which dropped significantly, pushing down total operating costs by 11% to C$988m from C$1.05bn one year earlier. As a result, operating income surged 7% to C$653m year-on-year.

While flagging its lowest ever first-quarter operating ratio of 58.9%, it reported diluted earnings per share of $3.51, or $2.5 on an adjusted diluted earnings per share basis.

Also in the first quarter, a non-cash gain of $181m ($156m after tax) “due to FX translation of the company’s US dollar-denominated debt (…) favourably impacted diluted EPS by $1.01”.

Adjusted return on invested capital was flat at 15.2%, but free cash flow was negative to the tune of C$71m (compared to a positive C$312m in the first quarter of 2015), while dividend per share was unchanged at C$0.35, based on a significantly lower share count, yielding a lower cash outlay.

Source: Transport Intelligence, June 21, 2016

Author: Alessandro Pasetti