Costs could dampen optimism around CP Rail

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Rail congestion around Chicago and rising costs are expected to trump a boost in shipping volumes when Canadian Pacific Railway Co. reports financial results for the second quarter on Thursday.

Some analysts have lowered their expectations for the Calgary-based railway's quarterly results in light of the higher costs associated with the slow traffic and long dwell times in the Chicago-St. Paul, Minn., corridor, in addition to lower regulated per-tonne rates for grain revenue.

But the massive grain backlog waiting to move and robust volumes in other business lines, on top of improved efficiencies, have analysts feeling optimistic about Canada's second-biggest rail company.

"CP Rail enjoys a very positive outlook for revenue growth over the coming two years, supported by strong demand for crude by rail and domestic intermodal service. CP Rail's productivity improvement momentum is robust, notwithstanding some moderate challenges along the Southern Corridor, which we expect to gradually ease going forward," said Bank of Montreal analyst Fadi Chamoun, who recently lowered his per-share profit estimate to $2.07 for the April to June period.

Mr. Chamoun has an "outperform" rating on rates CP shares, with a 12-month price target of $215.

Shares in CP traded at about $196 on Friday, up about 22 per cent so far this year. The 12-month consensus is $200, according to Bloomberg, with 58 per cent of the analysts rating the share a "buy."

Walter Spracklin, a Royal Bank of Canada analyst, said all large U.S. and Canadian railways face cost headwinds amid a surge in volume in the second quarter. But he said in a research note CP and Canadian National Railway have outperformed their U.S. counterparts in two key areas: train speed and time spent at terminals.

Citing higher costs and lower per-tonne grain revenue, Mr. Spracklin reduced his earnings-per-share forecast for the second quarter to $2.13.

But he raised his forecast for 2015 to $9.75 a share and hiked the share price target to $175 from $171, pointing to strong volumes in the grain shipping business.