Canadian Pacific Wows 'Em With A Sub-57% Operating Ratio

In the fight to have the lowest operating ratio (OR) among Class 1 railroads, Canadian Pacific Railway Limited CP just took first prize.

The company, in announcing its fourth quarter 2018 earnings Wednesday, said it had an OR of 56.5 percent during that period. That is an improvement of 370 basis points from the fourth quarter of 2017, and is well under the 60.3 percent reported by CSX Corporation CSX, whose reports of sub-60 ORs earlier in mid-2018 set off the process that had other railroads adopting precision railroading (PSR) practices.

But while much of the focus in precision railroading tends to be on service cuts and cost reductions (at least in its initial stages), Canadian Pacific had a quarter that was growth-oriented. Its revenues were up 17 percent from the fourth quarter of 2017, to C$2 billion (U.S. $1.5 billion) from C$1.7 billion. For the full year, revenues jumped 12 percent to C$7.3 billion from C$6.6 billion.

Here are some of the operating highlights in the company's earnings report:

--Revenue in its intermodal division rose 11 percent year-on-year, and intermodal revenue ton miles (RTMs) were up 7 percent. Freight revenue per RTM climbed 3 percent. There is "further upside in 2019 as we onboard new business and leverage demand management tools," CP said in a slide accompanying its call with investors.

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--On that call, John Brooks, the senior vice president of marketing, said "same store pricing continued to be strong." Brooks said it was in the upper end of a 3-4 percent "pricing environment, and it continues to remain healthy." Later in the call, he said renewals of existing business in the fourth quarter "actually pushed" 4.3 to 4.5 percent "type" numbers, "and it's looking like the first quarter is off to a strong start with those sort of similar type numbers." CEO Keith Creel said Canadian Pacific is still getting "robust demand" indications from its customers.

--Revenue was up in every segment, even in coal, which was up 21 percent. Agricultural products are the biggest part of CP's business, and grain revenues were up 5 percent. But agriculture-related category fertilizers and sulfur were up 18 percent, and potash was up 24 percent.

--Although one focus in PSR is on cost control, which on the surface is supposed to mean fewer workers and lower compensation costs, compensation and benefits were C$378 million, up from C$340 million, an increase of about 11 percent. Total employees on average for the quarter rose to 12,912 from 12,165, an increase of 6.1 percent. The criticism that PSR always means fewer employees and pay cuts clearly didn't hold for CP in the quarter. Total employees on average were up for the year also.

--Two other goals of PSR were positive. Average terminal dwell was down to 6.5 hours from 6.9 hours, and average train speed was up to 22.6 mph from 21.9 mph. Fuel efficiency was better as well; at 0.956 gallons of fuel consumed per 1,000 gross ton miles, improving from 0.984.

--As for the bottom and top lines, freight revenues rose to C$1.96 billion from C$1.667 billion, operating expenses rose to C$1.132 billion from C$1.031 billion (fuel was up C$50 million on top of the rise in compensation), and operating income jumped to C$874 million from C$682 million, hence the higher OR. Net income was down to C$545 million but the 2017 figure was helped by a big tax recovery benefit.

--The report beat Wall Street expectations, according to SeekingAlpha. Non-GAAP net income of C$4.55 per share beat estimates by C$0.23, but GAAP EPS of C$3.83 missed by C$0.47. CP stock closed Wednesday at $195.54 but post-earnings trade indicated an increase of about 1.25 percent.

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