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Here's Why Investors Should Retain Canadian Pacific KC (CP)
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Canadian Pacific KC’s (CP - Free Report) top line is bolstered by its strong segmental performance. The company’s efforts to expand is commendable. However, a surge in operating expenses and weak liquidity do not bode well for the company.
Factors Favoring CP
The merger of Kansas City Southern by Canadian Pacific in 2021, the first major U.S. railroad merger in over two decades, led to the formation of Canadian Pacific Kansas City Limited. This merger resulted in the creation of the first rail network connecting Canada, the United States and Mexico and is expected to enhance trade and transportation efficiency across North America. This expanded reach opens up new markets and routes, potentially increasing freight volumes. Management forecasts high single-digit annual revenue growth from 2024 to 2028, driven by an expanded product range.
In the first quarter of 2024, total freight revenues surged 55% year over year. CP's freight revenues have consistently risen over the years, showcasing resilience amid supply chain disruptions and market fluctuations. Revenues grew 4% in 2021, followed by a significant 10% increase in 2022. In 2023, freight revenues soared 42%. For the full year of 2024, revenues are projected to increase 14.8% year over year.
The company's dividend payments amid uncertainties reflect its financial confidence. With dividend payouts increasing from C$507 million in 2021 to C$707 million in 2022 and 2023, its financial growth and a proactive approach to rewarding shareholders are underscored.
Shares of CP have gained 2.3% in the past year compared with its industry’s growth of 0.3%.
Image Source: Zacks Investment Research
Key Risks
The northward movement in operating expenses is adversely impacting Canadian Pacific KC’sbottom line. This surge in operating expenses is primarily driven by the increase in labor costs and fuel costs.In the first quarter of 2024, fuel expenses rose 40% year over year to $458 million. The fuel price per gallon at the end of the quarter was pegged at $3.34 per gallon. Our model predicts a further increase in fuel prices, projecting them to reach $4.15 in the second quarter of 2024. Labor costs, comprising salaries and benefits (accounting for 29% of the total operating expenses), rose by 58% year over year to $690 million in the first quarter of 2024.
CP exited the first quarter of 2024 with $385 million in cash and cash equivalents while carrying a current debt load of $2.9 billion. This discrepancy suggests that the company does not have enough cash to meet its short-term obligations. The company’s current ratio (a measure of liquidity) at the end of the first quarter of 2024 was 0.49. A current ratio of less than 1 indicates that the company is likely to struggle to meet its short-term obligations.
SKYW has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average surprise of 128%. Shares of SkyWest have jumped 101% in the past year.
KEX sports a Zacks Rank #1 at present. Kirbyhas an expected earnings growth rate of 42.5% for the current year.
The company has an encouraging track record with respect to the earnings surprise, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 10.3%. Shares of Kirby have climbed 57.2% in the past year.
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Here's Why Investors Should Retain Canadian Pacific KC (CP)
Canadian Pacific KC’s (CP - Free Report) top line is bolstered by its strong segmental performance. The company’s efforts to expand is commendable. However, a surge in operating expenses and weak liquidity do not bode well for the company.
Factors Favoring CP
The merger of Kansas City Southern by Canadian Pacific in 2021, the first major U.S. railroad merger in over two decades, led to the formation of Canadian Pacific Kansas City Limited. This merger resulted in the creation of the first rail network connecting Canada, the United States and Mexico and is expected to enhance trade and transportation efficiency across North America. This expanded reach opens up new markets and routes, potentially increasing freight volumes. Management forecasts high single-digit annual revenue growth from 2024 to 2028, driven by an expanded product range.
In the first quarter of 2024, total freight revenues surged 55% year over year. CP's freight revenues have consistently risen over the years, showcasing resilience amid supply chain disruptions and market fluctuations. Revenues grew 4% in 2021, followed by a significant 10% increase in 2022. In 2023, freight revenues soared 42%. For the full year of 2024, revenues are projected to increase 14.8% year over year.
The company's dividend payments amid uncertainties reflect its financial confidence. With dividend payouts increasing from C$507 million in 2021 to C$707 million in 2022 and 2023, its financial growth and a proactive approach to rewarding shareholders are underscored.
Shares of CP have gained 2.3% in the past year compared with its industry’s growth of 0.3%.
Image Source: Zacks Investment Research
Key Risks
The northward movement in operating expenses is adversely impacting Canadian Pacific KC’sbottom line. This surge in operating expenses is primarily driven by the increase in labor costs and fuel costs.In the first quarter of 2024, fuel expenses rose 40% year over year to $458 million. The fuel price per gallon at the end of the quarter was pegged at $3.34 per gallon. Our model predicts a further increase in fuel prices, projecting them to reach $4.15 in the second quarter of 2024. Labor costs, comprising salaries and benefits (accounting for 29% of the total operating expenses), rose by 58% year over year to $690 million in the first quarter of 2024.
CP exited the first quarter of 2024 with $385 million in cash and cash equivalents while carrying a current debt load of $2.9 billion. This discrepancy suggests that the company does not have enough cash to meet its short-term obligations. The company’s current ratio (a measure of liquidity) at the end of the first quarter of 2024 was 0.49. A current ratio of less than 1 indicates that the company is likely to struggle to meet its short-term obligations.
Zacks Rank
CP currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks for investors’ consideration in the Zacks Transportationsector include SkyWest (SKYW - Free Report) and Kirby Corporation (KEX - Free Report) .
SkyWest currently carries a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 787% for the current year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SKYW has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average surprise of 128%. Shares of SkyWest have jumped 101% in the past year.
KEX sports a Zacks Rank #1 at present. Kirbyhas an expected earnings growth rate of 42.5% for the current year.
The company has an encouraging track record with respect to the earnings surprise, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 10.3%. Shares of Kirby have climbed 57.2% in the past year.