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Pricing, Volumes to Boost Canadian Pacific’s Q2 Earnings

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Canadian Pacific Railway (CP) is set to report its second-quarter earnings results before the market opens on Tuesday. The Canadian railroad company has an impressive earnings surprise history. It’s surpassed earnings estimates in eight of the last nine quarters with an average positive surprise of 1.6%.

Analysts expect CP to report strong double-digit bottom line growth in the second quarter. Analysts expect its adjusted EPS to be $4.17, implying a YoY (year-over-year) rise of 32%.

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Factors driving Canadian Pacific’s earnings optimism

Analysts expect higher revenue and PSR (precision scheduled railroading) system implementation to drive CP’s second-quarter earnings higher. The company is expected to report revenue of $1.97 billion, 12.7% higher than last year’s quarter.

Increased pricing and higher volumes could drive this YoY top line growth. In the first quarter, Canadian Pacific reported a 6% YoY rise in freight revenue per carload. Analysts expect the trend to continue in the second quarter as well.

Furthermore, according to the company’s latest weekly rail traffic data, it saw 5.6% YoY volume growth in the second quarter. Canadian Pacific’s intermodal volumes grew 6.9% in the quarter, while its carload traffic increased 4.8% YoY.

Moreover, Canadian Pacific’s earnings are likely to continue benefiting from its cost-saving initiatives. The company has implemented the PSR system to reduce network complexity and improve operational efficiency.

CP’s improving operating ratio indicates that its initiatives are bearing fruit. The operating ratio depicts operating expenses as a percentage of total revenue. Therefore, the lower the rate, the better it is for a railroad company. CP’s operating ratio improved 30 basis points to 61.3% in 2018 from 61.6% in 2017.

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Peers’ expectations

Analysts don’t expect US railroad companies’ second-quarter numbers to be rosy compared to their Canadian rivals. According to data compiled by the Association of American Railroads, US railroad companies’ overall rail traffic volumes fell 4.3% in the quarter.

US trade disputes with China and European countries are negatively affecting rail traffic volumes. Flooding in several North American regions and cheap natural gas prices are also contributing to the plunge in freight volumes. In the first quarter, Union Pacific and CSX reported YoY volume declines of 4% each. Norfolk Southern reported a 3.8% YoY fall in its rail traffic.

Analysts expect Union Pacific to report a ~1% YoY fall in its second-quarter revenue. The company registered high-single-digit growth in all four quarters of 2018. Similarly, analysts expect its EPS to rise 8.2% YoY compared to over 30% in 2018. Analysts expect Norfolk Southern’s top and bottom lines to grow 1.8% and 11.6%, respectively. In the first quarter, its revenue and EPS rose 4.5% and 30%, respectively.

Analysts expect CSX to report a 1.2% YoY revenue rise in the quarter. This growth expectation is lower than 4.8% increase it registered in the first quarter. Analysts expect its earnings to rise 9.4%, much lower than their 31% rise in the previous quarter.

Stock performance

With a YTD (year-to-date) return of 34.6%, Canadian Pacific is outperforming the broader market. The S&P 500 and the Dow Jones are up 20.2% and 17.2%, respectively, YTD. CP is also besting the gains of the iShares Transportation Average ETF (IYT), which is up ~16% YTD. IYT allocates nearly 54% of its fund to ground freight and logistics stocks.

Canadian Pacific stock has made a remarkable run so far this year. Investors seem confident about the company’s ability to deliver impressive bottom line results. Its sustained focus on improving operational efficiency and cost cutting could further boost its earnings. Its shareholder-friendly moves have also driven its stock up.

Correction: An earlier version of this article suggested that CPR reports earnings on Tuesday after the market closes instead of before the market opens.

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