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CP Stock Drops After Earnings Fall Short of Estimates

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Freight Train
Freight Train

Written by Amy Legate-Wolfe at The Motley Fool Canada

Canadian Pacific Railway’s (TSX:CP)(NYSE:CP) stock price fell on Friday morning, as the railway stock reported its fourth quarter of 2021.

CP stock earnings fall 33% year over year

  • CP stock reported earnings of $532 million in the fourth quarter, down 33% from $802 million the year before.

  • Revenue was up 1% to $2.04 billion, though its operating ratio increased to 59.2% year over year.

  • Some of this can be blamed on the recent US$31 billion acquisition of Kansas City Southern.

  • CP stock also took the opportunity to reaffirm its quarterly dividend of $0.19.

What happened in Q4 for CP stock?

CP stock announced earnings for the fourth quarter after market close on Thursday, Jan. 27. The company’s grain-hauling revenue took a major hit during the fourth quarter ending Dec. 31. Grain fell to $440 million — a 13% decline from last year when it was the company’s top revenue source at $508 million.

This came even as CP stock increased its corn shipments, with the company blaming it on the recent drought. However, management states they are using the drought as an opportunity to create a new supply chain from the U.S. into Western Canada, where it’s sorely needed. This created a record quarter and year for its U.S. grain franchise.

The Omicron variant also weighed on CP stock as well as extreme flooding in BC. The company earned $532 million for the fourth quarter — a 33% drop year over year. On an adjusted basis, it earned $0.95 per diluted share, down from $1.01 in 2020. Revenue increased 1% to $2.04 billion from $2.01 billion.

What did CP stock’s management say?

Of course, what many Motley Fool investors want to hear about is how the recent Kansas City Southern acquisition is affecting the company. And this came down to its operating ratio, which increased to 59.2% from 53.9% the year before. This included $36 million in costs related to the US$31 billion acquisition of Kansas City Southern. All of these factors led management to announce it would not be providing guidance for the year.

“With the timing and conclusion of the regulatory process in the hands of the STB (Surface Transportation Board) as well as with Omicron and other macro factors presenting some near-term uncertainty, we felt it was prudent not to provide formal guidance,” said CP stock’s chief financial officer Nadeem Velani in a meeting with analysts.

What’s next for CP stock?

A lot, apparently. CP stock still has no control over Kansas City Southern when it comes to its 2022 plan. Furthermore, it will depend a lot on spring production to see grain supply increase. CP isn’t the only one likely to be hit by this among railway companies. However, the recent quarter is a bit hit. And it certainly doesn’t help that the dividend remains cut at $0.19 per quarter.

So, this isn’t great news for short-term investors. But that isn’t a surprise. The major investment into Kansas City Southern sent shares down earlier this year, as it will weigh on the company for several years. However, long-term investors should hold onto the stock, according to analysts.

In fact, analysts continue to recommend CP stock over Canadian National Railway due to the recent acquisition. It’s made the company the only railway to stretch from Canada through the U.S. and into Mexico. This will create substantial long-term opportunities for the company and investors.

So, while the future doesn’t look so good right now, long-term investors may want to see this as an opportunity to increase their stake at low prices.

The post CP Stock Drops After Earnings Fall Short of Estimates appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe owns Canadian Pacific Railway Limited. The Motley Fool recommends Canadian National Railway.

2022

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