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US Tax Code Gains Boost Canadian Pacific’s 4Q17 Earnings

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4Q17 earnings

On January 18, 2018, Canadian Pacific Railway (CP) announced its 4Q17 results. The company beat Thomson Reuters analysts’ estimates for the quarter, posting adjusted EPS (earnings per share) of 3.22 Canadian dollars. On a YoY (year-over-year) basis, the railroad’s adjusted EPS were higher 6% than their level of $3.04 in 4Q16.

On a reported basis, the company’s diluted earnings in 4Q17 were $6.77 per share, ~160% higher than its diluted EPS of $2.61 in the same quarter of 2016. The rise was on account of an income tax recovery of $527.0 million resulting from US tax reform net of increases in the Canadian provincial tax rate.

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CPR’s stock price movements

Note that for 4Q17, compared to all US Class I railroad companies, Canadian Pacific Railway appeared far more bullish due to its increased 4Q17 earnings guidance. This kind of confidence wasn’t exhibited by any other major railroad company in the quarter. The market was quick to react, sending the stock up 2.5% to close at $186.7 on January 19, 2018, the day after its 4Q17 earnings announcement.

For a better understanding of how the market perceives the overall railroad industry, let’s take a look at CPR’s peers’ stock price movements on January 19, 2018:

  • Rival Canadian National Railway (CNI) rose 0.3%.
  • CSX (CSX) fell ~1%.
  • Norfolk Southern (NSC) fell 1.3%.
  • Kansas City Southern (KSU) fell 1.4%.
  • Union Pacific (UNP) rose 0.6%.
  • Genesee & Wyoming (GWR) rose 0.3%.

Major railroad and airline companies make up 6.2% and 5% of the portfolio holdings of the iShares US Industrials ETF (IYJ), respectively. On January 19, IYJ rose ~0.6%.

Management’s outlook for 2018

Riding high on the company’s 4Q17 earnings, Canadian Pacific Railway’s CEO, Keith Creel, said, “With a 2018 plan that balances strategic growth with continued productivity improvement, CP expects revenue growth in the mid-single digits and adjusted diluted EPS growth to be in the low double-digits.”

CP’s projections for adjusted diluted EPS growth in 2018 are based on its adjusted diluted EPS of $11.39 in 2017. The company assumes the Canadian-to-US dollar exchange rate to be in the 1.25–1.30 range with an effective tax rate of 24.5%–25%.

In this short series, we’ll cover Canadian Pacific Railway’s performance following its 4Q17 earnings release. In the next article, we’ll turn to its top line performance in the quarter.

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