Canadian Pacific Railway Limited (USA) (NYSE:CP) posted 1Q17 adjusted EPS of C$2.50, flat YoY, below BAML's $C2.55 estimate, but above consensus C$2.47. GAAP EPS was C$2.93 due to the recovery of C$51 million ($0.35/sh) for the early departure of its prior CEO, Hunter Harrison and C$28 million (C$0.19/sh) of FX translation of the U.S. dollar-denominated debt, offset by C$16 million ($0.11/sh) of tax adjustments. CP noted that winter weather was more challenging than the last year, but it believes that it turned the corner in March, and is seeing positive volume trends, including 6% growth in revenue ton miles (RTMs) in 2Q-to-date. It also noted a high level of confidence in its high single-digit EPS growth target for 2017, suggesting results will strengthen through the year. 1Q marked the long-anticipated transition of leadership at CP from Hunter Harrison to its new CEO and former COO, Keith Creel.
Mr. Creel noted that his work thus far as CEO has been focused on improving employee morale, which he acknowledged had taken a hit as a result of the company’s significant cost-cutting and reorganization efforts over the past several years. He also believes CP’s operating performance has created opportunities to grow revenue through customer additions, particularly in intermodal, where it enjoys particular network benefits and anticipates a tightening truck market in 2H17. Given the high incremental margins of this business, Bank of America Merrill Lynch views this as a critical next step towards the driving earnings growth.
Revenues were C$1.60 billion, up 1% year-over-year, but C$30 million below the firm's target. This was partially offset by adjusted operating expenses of C$983 million, C$23 million better than BAML's target, for a C$7 million ($0.03/sh) miss on adj operating income of C$620. Purchased services and fuel expenses increased C$57 million and C$45 million, respectively, reflecting higher oil prices and challenging winter conditions.
BAML reiterates its Buy but lowers its PO from $168 to $167 as the firm holds its 19.5x target multiple on the firm's 2017 US$ EPS estimate of $8.56. The firm lowers 2017, 2018, and 2019 EPS estimates 1% each from C$11.55, C$13.10, and C$14.50 to C$11.45, C$13.00, and C$14.40, respectively as the firm anticipates higher fuel expenses and moderately higher interest expense.