Canadian Pacific Earnings: Intermodal Activity Handily Outperforms Peers on New-Business Wins

Wide-moat railroad Canadian Pacific’s CP first-quarter revenue grew a solid 19% year over year (removing foreign exchange) on higher fuel surcharges, core rate gains, and surprisingly resilient volume expansion. Revenue came in ahead of our forecast on better-than-anticipated adjusted yield (up 10%) and volume (up 9%) gains.

Relative to first-quarter 2022, volume growth stems in part from network service gains (hiring progress and less winter-weather disruption), strong Canadian grain (favorable harvest), and recovering auto carloads (increased vehicle production). Also, CP’s intermodal container activity (up 4%) handily outperformed peers, especially rival Canadian National, which saw volumes fall in the double digits. We suspect strong new business wins this past year are comfortably offsetting headwinds from retail-sector destocking (high inventories), sluggish imports, and loose capacity in the competing truckload market.

CP’s adjusted operating ratio (expenses/revenue) improved an impressive 690 basis points to 62.9% due in part to more favorable winter weather, network service recovery (including velocity), and leverage from revenue growth. The OR came in at better than our expected run rate. Management did not provide specific guidance, but we will likely continue to bake in OR improvement in 2023 (ignoring the April 14 Kansas City Southern merger completion)—despite material wage inflation—due to solid core pricing, modest volume gains, and better network productivity.

We don’t expect to drastically alter our $68 fair value estimate. CP is benefiting from project development tailwinds and revenue synergies from the KSU merger will come into play, but we still see elevated downside risk to our 2023 top line and margin forecasts as North American industrial production has softened and retail end markets remain weak.