Canadian Pacific Railway Ltd. :CP-US: Earnings Analysis: Q1, 2017 By the Numbers : April 21, 2017

Canadian Pacific Railway Ltd. reports financial results for the quarter ended March 31, 2017.

We analyze the earnings along side the following peers of Canadian Pacific Railway Ltd. – CSX Corporation (CSX-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 1,211.23 million, Net Earnings of USD 325.66 million.
  • Gross margins widened from 40.73% to 45.29% compared to the same period last year, operating (EBITDA) margins now 53.46% from 48.08%.
  • Year-on-year change in operating cash flow of 48.09% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings declined although operating margins improved from 37.90% to 43.04%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-03-31 2016-12-31 2016-09-30 2016-06-30 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 1211.23 1226.8 1191.36 1124.8 1158.12
Revenue Growth (%YOY) 4.59 -2.89 -8.79 -16.23 -13.68
Earnings (mil) 325.66 287.78 266.02 254.44 393.08
Earnings Growth (%YOY) -17.15 20.46 7.76 -19.78 52.44
Net Margin (%) 26.89 23.46 22.33 22.62 33.94
EPS 2.21 1.96 1.79 1.67 2.56
Return on Equity (%) 36.05 32.88 29.7 26.43 41.69
Return on Assets (%) 8.96 7.86 7.22 6.87 10.75

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Market Share Versus Profits

Revenues History
Earnings History

CP-US‘s change in revenue this period compared to the same period last year of 4.59% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CP-US is holding onto its market share. Also, for comparison purposes, revenues changed by -1.27% and earnings by 13.17% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 40.73% to 45.29%, while operating margins improved from 48.08% to 53.46% over this period. For comparison, gross margins were 47.28% and EBITDA margins 54.67% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

CP-US‘s change in operating cash flow of 48.09% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from 37.90% to 43.04%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from 44.63% to 36.12%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Canadian Pacific Railway Ltd. engages in the operation of transcontinental railway. It provides logistics and supply chain expertise. The company offers rail and intermodal transportation services to business centre of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. It transports bulk commodities, merchandise freight and intermodal traffic. The company was founded in 1881 and is headquartered in Calgary, Canada.

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