A strong focus on efficiency and investments in new rolling stock and software helped this rail giant increase revenue 6.3% in the most recent quarter, with earnings also up.

The company plans to spend $1.6 billion on upgrades to tracks and locomotives in 2019, mostly on 5,900 new railcars for shipping grain. This comes in response to new federal regulations designed to increase oil help oil transport.

The stock trades at a reasonable 19.5 times the company’s 2019 earnings forecast.

CANADIAN PACIFIC RAILWAY LTD. (Toronto symbol CP; www.cpr.ca) transports freight over a 23,700-kilometre rail network between Montreal and Vancouver, and to hubs in the U.S. Midwest and Northeast.

Shipping bulk commodities, such as grain, coal, potash and fertilizers, supplied 41% of CP’s revenue in 2018. Merchandise such as automotive equipment, metals, consumer products and forest products accounted for a further 37%. The remaining 22% came from intermodal traffic, which consists of containers that travel by rail, ship and truck.

CP’s revenue rose 1.4%, from $6.62 billion in 2014 to $6.71 billion in 2015. However, revenue fell 7.2% to $6.2 billion in 2016. That decline was largely because producers of commodities, such as oil, potash and minerals, shipped less of their products in response to lower selling prices.

Revenue then rose 5.2% to $6.55 billion in 2017 on stronger volumes of fracking sand, crude oil, chemicals and plastics, domestic intermodal, potash and Canadian grain. Revenue jumped 11.6% to a record $7.32 billion on higher volumes of crude oil, chemicals, potash, and intermodal containers.

Excluding unusual items, CP’s overall earnings rose 9.6%, from $1.48 billion in 2014 to $1.63 billion in 2015. Due to fewer shares outstanding, earnings per share rose at a faster rate of 18.8%, from $8.50 to $10.10. Due to the drop in revenue, CP’s earnings in 2016 fell 4.7% to $1.5 billion, but earnings per share rose 1.9% to $10.29 on fewer shares outstanding.

Earnings recovered 7.6%, to $1.7 billion in 2017, while earnings per share, again on fewer shares outstanding, gained 10.7%, to $11.39. In 2018, earnings jumped 24.8%, to a record $2.08 billion; per-share earnings were up 27.4% to $14.51.

The main reason behind CP’s higher earnings is its strong focus on efficiency. In the past few years, the company has invested heavily in new locomotives, tracks, and software to optimize train loads and speeds.

CP’s earnings in the three months ended March 31, 2019, rose 0.5%, to $392 million from $390 million a year earlier. Due to fewer shares outstanding, per-share earnings rose at a faster rate of 3.3%, to $2.79 from $2.70.

In the quarter, revenue improved 6.3%, to $1.77 billion from $1.66 billion a year earlier. Most of the higher revenue came from shipping crude oil, grain, potash, and forest and automotive products. Those gains offset declines in metals, minerals and fertilizer volumes.

Due to weather-related delays during the winter, CP’s operating ratio in the quarter worsened to 69.3% from 67.5%. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower that ratio is, the better.)

In 2019, it plans to spend $1.6 billion on upgrades to tracks and locomotives, equal to what it spent in 2018.

The outlays will help buy 5,900 new railcars for shipping grain (called “hoppers”) over the next four years. The company expects to have 1,000 hoppers in service by mid-2019.

The upgrade to CP’s hopper fleet comes in response to new federal regulations that encourage railways to replace older government-owned cars with new models. As well, the new hopper cars carry 15% more grain than the older models. That will let CP cope with rising grain volumes and speed up its deliveries.

The company can comfortably afford to keep improving its equipment. As of March 31, 2019, it held cash of $352 million and its long-term debt of $8.4 billion is a moderate 19% of its market cap.

Blue Chip Stocks: Rising free cash flow should help lower debt

What’s more, CP will probably generate free cash flow (regular cash flow less capital expenditures) of $1.48 billion in 2019. That’s up 27.1% from $1.16 billion in 2018 and provides lots of room to keep paying down debt.

The company also continues to buy back its shares, which raise earnings per share and other per-share calculations. Buybacks also give the remaining shareholders a larger stake in the company.

Under its current authorization, CP can still purchase up to 2.79 million shares (2% of the total) by October 23, 2019.

The company recently signed a three-year contract with Alberta’s previous NDP government to transport crude oil over its rail lines. It’s likely the new United Conservative government could cancel the deal. However, demand for crude-by-rail service should continue to improve as the new government will probably eliminate the recent production cuts. CP expects the number of carloads transporting crude will rise nearly 50% in the second quarter of 2019 from the company’s volumes in the first quarter.

CP has also secured an exclusive contract to ship plastics from a new facility that Inter Pipeline Ltd. (Toronto symbol IPL) is building near Edmonton. That facility should begin operating in late 2021.

For all of 2019, the company still expects its earnings per share to rise at least 10% to $15.96. The stock trades at a reasonable 19.5 times that forecast. With the July 2019 payment, CP will raise its quarterly dividend by 27.7%. The new annual rate of $3.32 a share yields 1.1%.

Recommendation in The Successful Investor: Canadian Pacific Railway is a buy