An earnings warning from Canadian Pacific Railway Ltd. has triggered an avalanche of cautionary notes from analysts, who see a series of challenges ahead for the freight carrier.
CP shares slid 2.8 per cent Tuesday after the country's second-largest railway slashed its estimates for earnings per share in the first quarter to a range between 12 and 22 cents, or a drop of about 40 cents from the same period last year. Analysts had been expecting that the company would earn 74 cents a share in this year's first quarter.
Calgary-based CP's profit warning, issued after stock markets closed on Monday, surprised analysts because they figured that CP already had factored in the ill effects of winter weather, notably avalanches that disrupted freight operations in Western Canada.
Challenges on the horizon include the rising cost of diesel fuel needed to run locomotives, choppy freight volumes and increased expenses from ramping up operations in anticipation of a rebound in shipments.
RBC Dominion Securities Inc. analyst Walter Spracklin, whose first-quarter EPS forecast of 60 cents was below consensus estimates, said CP's revised outlook will be a drag on the company's stock because it raises questions about why winter storms hit CP so much harder than Canadian National Railway Co.
Mr. Spracklin said even though CP's trains must traverse steeper grades through the Rockies than CN, the cold weather disrupted CP's operations throughout the crucial corridor from Saskatchewan and Alberta to the Port of Vancouver. He said CP's "system flex" - its ability to bounce back from adversity such as weather woes - appears to be weaker than analysts thought.
"Work needs to be done in terms of CP setting itself up for a better bounce back from shocks to the system," Mr. Spracklin said in an interview Tuesday.
For roughly 18 months, he had preferred CP over CN, but he switched to CN as his favourite Canadian railway in mid-February, believing that CP's rally was running out of steam. Also, CN has an industry-leading operating ratio, a key indicator of productivity that measures operating costs as a percentage of revenue.
TD Securities Inc. analyst Cherilyn Radbourne noted that CP's executive vice-president of operations, Ed Harris, a former top executive at rival CN, will retire on April 1, only one year after CP recruited him. His "brief tenure" might not have been enough to forge "lasting change," she said.
Mr. Harris will be replaced by Mike Franczak, currently CP's senior vice-president of operations, who will guide CP's North American network, including responsibility for safety and customer service.
Stern Agee analyst Jeff Kauffman said severe storms and increased fuel prices threw CP for a loop, and the ripple effects could be seen in track outages that hurt coal, grain and intermodal volumes.
While Mr. Kauffman maintained his 52-week price target of $70 for CP, several other analysts chopped their targets. Mr. Spracklin and Desjardins Securities analyst Benoît Poirier reduced their 52-week targets to $72 from $75, while UBS Securities Canada Inc. analyst Tasneem Azim cut her target to $72 from $77.
Ms. Azim said CP's train velocity earlier this month was down 13 per cent from a year earlier, compared with average decline of 3 per cent at other major railways, a difference in speed that underscores CP's "operational challenges related to severe weather conditions."
In the battle between Canada's two largest railways, CP's freight traffic is lagging.
Some CP volumes have declined ...
-13.1% agricultural products
. . . while some CN shipments have risen
+7.9% agricultural products
Figures for 10 weeks ended March 12, compared with same period in 2010.
Source: Association of American Railroads; RBC Dominion Securities Inc.Report Typo/Error