Is Canadian Pacific Railway on track to hit growth targets?
In the previous part of this series, we noted that Canadian Pacific Railway (CP) posted robust results for the third quarter with a 9% increase in revenue and a 26% increase in profit.
Pershing Square Management said in its latest shareholder letter, “On the strength of its 3Q results and the company’s outlook for the fourth quarter, CP maintained its full-year guidance, which calls for 6% to 7% revenue growth, a 35% or higher operating margin, and 30% or greater EPS growth. This guidance indicates that the company is on track to reach its original four-year margin target in just two years, given the rapid pace of the operational transformation.”
Diluted EPS expected to double over the next four years
In October, Canadian Pacific Railway (CP) announced new growth targets and said it expects to more than double its diluted earnings per share (or EPS) over the next four years compared to 2014. It also expects $10 billion of revenue by 2018, which represents a 10.5% compound annual growth rate. The company said it will achieve its objectives for 2016 a full two years early, including an operating ratio in the mid-60s and cash flow before dividends of $1 billion.
Pershing Square Management noted that “according to CP, this impressive revenue growth is driven by the company’s vastly improved operations that allows it to compete profitably for business it could not previously serve with its historically bloated cost structure.” Canadian Pacific Railway (CP) said it will “accelerate growth over the next four years even as it maintains a tight focus on cost containment.” The company said its growth plans include investments in key corridors to leverage franchise strengths, including siding extension and terminal enhancements and premium service driven by velocity.
Pershing Square to benefit from Canadian Pacific’s earnings growth
Pershing Square also stated that “CP’s announced revenue and margin goals equate to $20 per share in earnings in 2018 including the impact of projected share repurchases, which is 138% above 2014 analysts’ consensus estimates of $8.41 per share.” The fund said that “at the inception of its investment in 2011, CP earned $3.15 per share. The achievement of $20 per share in earnings would represent more than a six-fold increase in the earnings power of the business following the proxy contest and Hunter Harrison’s appointment as CEO.”
Stocks of U.S. railroads, including CSX Corporation (CSX), Norfolk Southern Corp. (NSC), and Kansas City Southern Railway (KSU) were up in October on reports of consolidation in the railroad industry. News reports speculated that the companies were takeover targets for Canadian Pacific Railway or its rivals Canadian National Railway (CNI) and Union Pacific Corporation (UNP). CSX Corporation (CSX), Norfolk Southern Corp. (NSC), Kansas City Southern Railway Company (KSU), and Union Pacific Corporation (UNP) are components of the iShares U.S. Transportation exchange-traded fund (or ETF) (IYT). We’ll cover this more in the next part of this series.