Canadian Pacific Railway Limited Disappoints in Q1: Why Now Might Be Time to Sell

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) could see its share price start to tank after a poor start to the new fiscal year.

| More on:
The Motley Fool

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) released its first-quarter results on Wednesday, which saw the railway operator get off to a poor start to the year. While revenues of $1.66 billion were up a modest 3.7% from last year, rising expenses eroded a lot of that benefit, as the company’s bottom line declined by nearly 20%. Per-share earnings of $2.41 were also well below analyst expectations of $2.64.

Company blames poor weather and high demand

CP Rail’s CEO, Keith Creel, was quick to point out that the company ” battled extreme weather and unprecedented demand” in Q1, which saddled the company with inefficiency and added costs to its financials. However, he was quick to point out the positives, and that CP Rail was looking to a strong Q2 as the company “built a tremendous amount of momentum through March — one of our best months in recent history — positioning us well for the rest of the year.”

Canadian National Railway (TSX:CNR)(NYSE:CNI) has also seen spikes in demand over the past several months, and the company even announced it would be having a hiring spree in order to accommodate it.

Operating expenses up more than 12%

Last year, CP Rail was able to keep its expenses for the quarter just under $1 billion; however, that wasn’t the case in Q1 as costs rose to over $1.1 billion. Fuel-related expenses saw the biggest increase from last year, rising 26%, while compensation and benefits also rose by 25% year over year. These spikes in cost resulted in the company’s operating income declining by more than 10% this quarter.

Carloads up by 4%

Overall, CP Rail had a lot of activity in the quarter, as only a few of its segments were down year over year. Carloads transporting grain were down 8%, while automotive parts declined 6% in the quarter. However, potash volumes rose by 19%, and energy, chemicals, and plastics also saw double-digit increases, as carloads were up 11% from a year ago.

Looming strike could further disrupt operations

On Wednesday, CP Rail was given strike notices by 3,400 workers that could be off the job within 72 hours. With the company still struggling with problematic weather, labour problems will only compound the issues the railway operator has faced this year, and that could make investors even more bearish.

Is the stock a buy?

CP Rail’s share price has risen more than 11% in the past year, although it is down 1% to start the year, and these results will likely send the stock even further down in price. Railway stocks have been doing well as the economy has been strong in recent years; however, there are reasons why we could expect that to slow down as early as this year, and that could make it a bad time to buy.

The stock has not fallen victim to the big sell-offs that we’ve seen take place across many sectors this year, and that could make it due for a drop in price, especially with the stock trading at five times its book value.

Overall, CP Rail had a bit of a disappointing quarter, and while weather certainly played a big factor, there are other concerns that could impede upcoming quarters as well.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

More on Investing

think thought consider
Tech Stocks

Is CGI Stock a Buy Even With No Dividend Yield?

CGI stock may not have a dividend to speak of. But does that necessarily mean you should ignore this top…

Read more »

A robotic hand interacting with a visual AI touchscreen display.
Tech Stocks

Why Now Is the Time to Invest in Canadian AI Stocks

Are you looking for one of the most solid Canadian AI stocks out there? This one is probably your best…

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

Why AI Stocks Should Be in Every Canadian Investor’s Portfolio

AI stocks continue to be one of the best options out there for long-term investing, especially when considering Canadian options.

Read more »

stock research, analyze data
Bank Stocks

Canadian Bank Stocks: Buy, Sell, or Hold?

There are opportunities and risks on the horizon for the Canadian banks.

Read more »

Young Boy with Jet Pack Dreams of Flying
Stock Market

Is Air Canada Stock a Good Buy After Its Q3 Results

Down almost 60% from all-time highs, Air Canada is an undervalued TSX stock that remains an enticing investment in November…

Read more »

cloud computing
Investing

Where to Invest $10,000 in November

Given their solid underlying businesses and healthy growth prospects, I expect these two defensive stocks to outperform uncertain outlook.

Read more »

coins jump into piggy bank
Retirement

Here’s the Average RRSP Balance at Age 44 for Canadians

Holding stocks like Alimentation Couche-Tard (TSX:ATD) in an RRSP is a good way to build your wealth.

Read more »

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »