CANADIAN PACIFIC RAILWAY LTD. $134 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 175.0 million; Market cap: $23.5 billion; Price-to-sales ratio: 3.9; Dividend yield: 1.0%; TSINetwork Rating: Above Average; www.cpr.ca) transports freight between Montreal and Vancouver and connects with hubs in the U.S. Midwest and Northeast. It gets 25% of its revenue from the U.S.
CP was our top pick for 2012 at $69. Since then, the stock has jumped 94.2%.
The company continues to improve its efficiency, mainly with more efficient locomotives, better tracks, and software that optimizes train loads and speeds. In the quarter ended June 30, 2013, CP’s earnings soared 144.7%, to $252 million from $103 million a year earlier. Per-share earnings gained 138.3%, to $1.43 from $0.60, on more shares outstanding.
Revenue rose 9.6%, to $1.5 billion from $1.4 billion. The company saw gains from shipping consumer and industrial products (up 23.9%), grain (up 21.0%), forest products (up 10.4%) and fertilizer (up 8.7%). These increases offset declines in automotive products (down 8.6%) and coal (down 2.7%). Intermodal revenue was unchanged.
The company’s operating ratio improved to 71.9% from 82.5% a year ago. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower the ratio, the better.) CP aims to cut its operating ratio to around 65% by the middle of 2016.
CP estimates that interruptions to its service, including flooding in Calgary and south-ern Alberta, cut its second-quarter revenue by $25 million. However, its improved efficiency helped it quickly get back to normal. CP’s lower costs will also help it adapt to new rail-safety regulations in the wake of the July 6 train crash in Lac-Megantic, Quebec.
For all of 2013, CP expects to spend $1.2 billion improving its tracks, trains and other equipment. Its strong balance sheet will help it pay for these upgrades: its long-term debt of $4.7 billion is a moderate 20% of its market cap. The company ended its latest quarter with cash of $442 million, or $2.53 a share.
The stock seems expensive at 21.7 times the $6.17 a share the company will probably earn in 2013. However, that’s still a reasonable multiple in light of CP’s improving efficiency. The $1.40 dividend yields 1.0%.
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