Canadian Pacific Railway Limited

Canadian Pacific Railway Limited (TSX: CP) is a coast-to-coast railway and operates across the North America which has links to major ports of the region.

Key Highlights:

• Improved Performance Metrics: Despite a tight economic condition, the company has managed to report improved operating metrics, supported by application of in-house technologies, Robotic Process Automation, which has enhanced the safety and efficiency. Moreover, implementation of Predictive analytics has reduced online failures by ~91%, which also lowered the risk of derailments, rail fatigue and service interruptions. The group reported 8% and 7% increase in the average train length and average train weight, respectively from Q1FY20, and a whopping 47% y-o-y increase in FRA train accident frequency.                

Source: Company Presentation

• Impressive Guidance: For FY21, the company expects its adjusted diluted EPS to record a of double-digit growth over FY20. Moreover, the company expects its volume to grow by higher single digit for FY21. CP expects its capital expenditure of CAD 1,550 million, while majority (~50%) of which is expected to be utilized for maintenance purpose.                                               

Source: Company Presentation

Q1FY21 Financial Highlights:

• CP announced its quarterly result, wherein the company posted total revenues of CAD 1,959 million, down 4% on y-o-y basis. This decrease was primarily due to the negative impact currency volatility, coupled with lower fuel surcharge revenue due to the timing of recoveries.
• Total operating expenses remained lower at CAD 1,179 million v/s CAD 1,209 million in Q1FY20, supported by lower expense from purchased services and other (CAD 274 million v/s CAD 312 million in pcp).
• Net income soared to CAD 602 million, from CAD 409 million in the previous corresponding period (pcp), supported by other income of CAD 28 million, as compared to other expense of CAD 211 million in pcp. Additionally, a slightly lower net interest expense (CAD 110 million v/s CAD 114 million in pcp) also supported the bottom-line.
• Cash and cash equivalents stood higher at CAD 360 million, from CAD 147 million in FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the commodity prices coupled with higher fuel costs may dampen the company’s profitability and margins.

Valuation Methodology (Illustrative): Price to Earnings-based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The operations of the company are resilient in nature, due to the nature of the business. Free cash flow in Q1FY21 stood at CAD 296 million, significantly higher than CAD 158 million in pcp. Long-term debt to net income ratio improved significantly to 3.7x in Q1FY21 from 4.2x in pcp. The above indicates improved financial flexibility and is a key positive. Moreover, the company reported its strategic collaboration with the industry leader Maersk, wherein the group would create a state of transload that would remove thousands of trucks from Greater Vancouver roads, indicates cost efficiency. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Union Pacific Corp, Norfolk Southern Corp etc. Considering the aforesaid facts, we recommend a ‘Watch’ rating on the stock of CP at the last closing price of CAD 461.22 on April 28, 2021 and suggest investors to wait for a better entry point.

One-Year Price Chart (as on April 28, 2021). Source: Refinitiv (Thomson Reuters)

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