Canadian Pacific Turns in Solid Execution

CP continues to meet our expectations of profit margins close to its best-in-class neighbor, Canadian National. Looking forward, CEO Keith Creel asserted that in 2018 a mid-50s operating ratio is a “very reachable number,” even excluding land sales. We model 57% in 2018 and continuing improvement over the next four years, due chiefly to labor efficiency gains.

Persistent and heavy capital expenditure demands are a hallmark of the railroad industry, and CP is no exception. Most capital expenditure (60%-70%) is for maintenance, but CP mentioned an investment designed to smooth intermodal drayage: It is installing automatic gate equipment at all intermodal terminals, coupled with a mobile application to manage truckers’ container pickup or drop-off incidents. We believe intermodal is the secular volume driver at the rails, and investing to support this growth will remain a locus of growth capital investment.

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