2015 EPS estimate $2.58. Forward P/E ratio 19.7x at today's price $50.9/share. Buying here requires extremely long term time horizon.
Wall street loved Q4 earnings, and shares are soaring after hours. Can't explain why shares jumped 6.28% before earnings were announced. It seems to me that the share buyback was slightly less than I expected, and the effective tax rate was quite a bit better than anticipated. Cash is gone, and backlog has shrunk.
Q4 Revenue--$122.6 million vs. estimate=$101.9 million
Net income 53 cents vs estimate 40 cents in Q4
Eff Tax rate for 2014 was 32.5% vs 36.5% in 2013
Cash +cash equivalents=$8.9 mn vs $55.1 mn in 2013
Backordered units=651,400 vs 1,520,800
Shares outstanding reduced from 19.3 million to 18.7 million, or about 3.2% due to buyback
Distributor inventory 326,700--company inventory 104,200
Can anybody predict 2015 earnings?
Railway Age article says the diluent added to bitumen (to make it less viscous) lowers the flash point of the mixture, making it highly explosive--e.g.CN derailment and explosion in Ontario at subzero temperatures. CSX derailment and fireballs stemmed from transport of Bakken crude oil.
Savannah, Georgia, is the fastest growing port in the U.S. The Harbor Authority is dredging the harbor to accommodate larger vessels. Freight volumes surging, even before West Coast strike.
Above title links to Bloomberg story about Port of Savannah. Ships arrive from Europe, India, SE Asia, and Middle East. Railroads serving Savannah include Genesee and Wyoming, CSX, and Norfolk Southern.
From Journal of Commerce
ongelluzzo, Senior Editor | Feb 20, 2015 9:52PM EST
Negotiators for the International Longshore and Warehouse Union and the Pacific Maritime Association have reached a tentative coastwide contract agreement for five years after more than nine months of bargaining.
ILWU President Robert McEllrath and PMA President James McKenna said they were pleased to reach the tentative contract agreement. “We are also pleased that our ports can now resume full operations,” they said in a joint release.
The membership of both groups must now vote to ratify the contract, a process that could take several weeks. The details of the agreement were not immediately available.
The deal was also praised by Long Beach Mayor Robert Garcia. He thanked President Obama and Labor Secretary Thomas Perez for helping to push the agreement forward in a difficult negotiating environment.
The National Retail Federation said the efforts of management and labor must now be to clear the backlog of containers and vessels at West Coast ports.
CSX at Barclays Industrial Select Conference 2/18/2015
Fredrik Eliasson CFO
Expect double digit earnings growth. Target mid-sixties operating ratio. Loss of coal business is a major headwind. .
Difficult weather in NE United States-snowstorm. 400 Employees couldn’t get to work yesterday. Easy comparisons with Q1 2014 . Volume shows “good vibrancy”. Crude- by- rail will still grow but less than we anticipated. Domestic coal—low nat gas prices and mild winter weather reduced coal demand, maybe down 5% year-on-year. Chicago is very fluid this year, less weather disruption, better coordination among railroads.
Western and Canadian vs. Eastern railroads:
Western railroads have higher, about 4.5x-6x EV/revenue, because they can achieve low sixties operating ratio. We have lost nearly $900 million coal revenue since 2011, a very abrupt dislocation, which impairs our operating ratio. We don’t have the length of haul vs. the Western RR’s. We are short haul RR’s--- can only run 600 miles vs. Western railroads 1100 miles—most of the costs are at the nodes, not the links. We have an advantage of population density, and the opportunity of an untapped [East Coast] intermodal.market which other railroads do not have.
Profitability of intermodal vs. coal-
Chemicals and coal are highly profitable. Intermodal margins are attractive because load travels in both directions. Profitability in intermodal now on par.
Intermodal truckload opportunity
Opportunity in service and reliability—reliability speed. Created a hub and spoke network in NW Ohio for intermodal. We have significant capacity—little incremental cost to grow intermodal.
Only one supplier in the locomotive market right now. We purchased 200 locomotives and rebuilt 150 locomotives. These will increase our velocity.
Capex estimated 16-17% of revenue. 80% of capex goes to maintenance rails and cars, 20% goes to growth.
Use of excess cash flow? Reinvest capital in growth,hig dividends, share repurchase
Barclays Industrial Select Conference 2/19/2015
Rob Knight , CFO:
Freight volumes YTD are flat to +1% vs. year ago levels. West Coast port shutdown has $5 million revenue impact per day. Most of that freight cannot be diverted to East Coast, so revenue is deferred, not lost. Coal volumes are down—utilities have a 4-5 day diminished inventory versus year ago levels. Powder River is our main coal basin. We have furloughed crews, and placed locomotives in storage.
Shale only 4% of total volumes—2.5% sand, and 1.5% crude oil. Rig counts and volumes coming down.
Unlimited opportunity to attract intermodal away fro m trucking. Good opportunities for freight growth at border with Mexico—we are the only RR that meets all six rail crossing points. Autos and intermodal opportunity. Grains are another cross border growth opportunity. Chemicals strong in the Gulf, construction in Texas strong.
Capex spending target 17% of revenue. Return on invested capital is 16% using book value, but only 8% using replacement cost.
Uses of excess cash flow:
Dividends and share repurchases.
If I were an engineer and needed to transport 100 cars of coal from Powder River Basin to Chicago, and had two engines, I would perhaps make two trains of 50 cars for the journey, instead of one long train. It seems to me that long trains would be slow to accelerate and decelerate, and more likely to fracture the couplings attaching the first car to the engine. Long trains would be unstable on declines, prone to buckling, unless cars could be braked individually. Also more likely to generate harmonic vibrations on the rails. However, I have read that long trains have greater velocity, which seems counterintuitive.
CSX Corporation Shouldn't Trade At A 25% Discount To Peer Averages
Seeking Alpha article linked above has interesting "comments" about recent derailment event.
Railway Age article says main problem is transporting "hot oil" containing explosive gas, Says shippers remove the gas in Texas before transporting, but not in South Dakota.
Oil train mishaps reveal tank car strengths and limitations
Written by David Thomas, Contributing Editor
Two same-day derailments of crude oil trains in Canada and a third in West Virginia two days later illustrate the strengths and limitations of the newest general-purpose tank cars plying North American rails.
CN’s seven-car blaze late Saturday, Feb. 14, 2015 in a roadless area of northern Ontario, where 29 cars of a 100-car train derailed, involved CPC-1232 cars, CN confirmed to Railway Age. But a smaller event in the early hours of the same day in southern Alberta was an encouraging real-world trial of the industry's voluntary CPC-1232 tank car design, in production since 2011.
CP Derailment Sometime before dawn, a westbound Canadian Pacific train carrying crude from Western Canada jumped the tracks in the midst of a rocky debris field created in 1903 when Turtle Mountain collapsed, flooding the Crowsnest River valley with a vast flow of limestone boulders and killing 90 people. In Saturday’s incident, 12 CPC-1232 tank cars derailed, two of them toppling into the debris field and coming to rest on their sides (top two photos, by David Thomas). No crude leaked from the two tank cars, which were jacked upright and emptied of their lading into three rescue tankers dispatched from Lethbridge, along with several hopper loads of ballast to repair the track. On-site supervisors said a broken rail was responsible.
The CPC-1232 car is designed to contain its lading in relatively slow-speed derailments and rollovers. As the Crowsnest Pass event indicates, they work as designed in low-energy......
Shouldn't CSX and NSC benefit from the West Coast congestion?
From Drewry's Container News:
"Along the main USEC [US East Coast] artery of the trade, November’s 14.6% year-on-year uplift in traffic from Asia was matched by a similar percentage gain in December. For the whole of 2014, Asian exports entering all US gateways increased by 6.3% to 13.9 million teu with East Coast volumes up 10.5% compared to a 4.8% rise in West Coast flows. The much smaller US Gulf Coast market saw an advance of 7.8%.
During the fourth quarter, the gap between EC [East Coast] and WC [West Coast] growth widened appreciably with imports landed on the US western seaboard posting an uplift of only 3.6% while EC loads rose by 13.4%. If one works on the premise that under normal circumstances cargo growth rates should be broadly similar across the US eastern and western seaboards then it would appear that as much as some 150,000 teu could have been diverted to the USEC during 2014.
Yahoo key statistics show forward P/E ratio =13.5x and analyst estimates of $11.11 for FY2015.
It seems to me the $11.11 should be in $Canadian, since CP reports in Canada and earned C$8.46 for FY2014, and stated that EPS would increase by 25% in 2015., and 1.25xC$8.46=C$10.57.
So forward P/E should be calculated from the $Canadian share price, which is about C$220/share.
So forward P/E=220/10.57=20.8x. So the Yahoo statistic is a fabrication.
Using the metric you have suggested, "cash earnings", numbers look worse if measured in $US. For example, CAD/USD=$0.72 January 2015, and CAD/USD=$0.91 January 2014. Then "cash earnings" in 2014=$0.72x674=$485 mn, and in 2013 $.91x714=$650 mn, so it appears "cash earnings" dropped in 2014 by 25%.
Also, shareholders' equity diminished from $7.1 billion to $5.6 billion, which resulted mainly from a huge decrease in the "pension asset" from $1.03 billion to $0.30 billion due to lower interest rates and a lower assumed rate of return for defined benefit pension plans.
On the bright side, property value of Canadian Pacific is vastly understated. Market value of the shares is $30 billion, and properties are carried on the books at $14 billion. But the property--a right-of-way from ports on the coastlines of two oceans and the Great Lakes, to large North American cities, has incalculable value compared with replacement cost. The special nature of the property, railway right-of-way, will permit a 4% increase in revenue for CP next year simply from freight rate increases,
Also, if a U.S. railway were permitted to merge with CP, it's corporate tax rate would drop from the 35% US statutory rate to the 26% Canada rate, like the Burger King and Tim Hortons deal. So Canadian pacific has a valuable asset in it's Canadian domicile. We know that shareholder William Ackman has a keen awareness of the CP tax rate, since he was involved with the Walgreens-Boots and Valeant-Allergan discussions.
Summarizing, valuation of railroads seems like pretty tricky business to me....
Big Sky Business Journal--New regulations in ND will place greater pressure on oil production.
Search for the following article:
Shale Oil Production In Bakken & Eagle Ford Up 1.6% in December: Platts' Bentek Energy
Production from these Prolific Shale Plays Up 36% Compared to Year Ago Levels
Denver, Houston - January 15, 2015
Platt's says that ND Bakken shale oil was 900K b/d in December 2013, and 1.2 mn b/d in Dec 2014. Price/barrel for Williston basin shale oil was $38.43 on Jan 13, 2015.
If Brent crude is $45/b, producers will want to transport this oil to Vancouver and Prince Rupert and export it.
Next year will be a great year for Canadian Pacific, compared with all other railroads, because:
( 1) Rail carload pricing +3.7% in 2015
From the Journal of Commerce:
"Shippers say the sharpest price increases among domestic modes will be in rail carload transport. Rail carload pricing is expected to rise on average 3.7 percent, the healthiest pace in three years, according to survey results. Railroads enjoy strong carload pricing power as there are few competitive options and some shippers only have access to the network of a single Class I railroad."
(2) CSX conf call explained that oil-by-rail and frac sand traffic are strong as ever, since drillers already have made the front-end capital expenditure, and this situation will persist at least until early 2016.
(3) CSX conf call said traffic in the Chicago hub the last 11 weeks has been "normal" despite cold weather. [Not very snowy in Chicago compared with last year--almost no snowfall, I have observed.]
(4) High demand for rail transport, no matter what happens with oil price, according to multiple sources..
(5) Low corporate tax rate in Canada, 24% vs. 35% in U.S. gives Canadian companies a higher ROE, and an advantage in merger and acquisitions. This advantage belongs to CP and CNI in equal measure.
(6) Hunter H. retrofits locomotives, instead of buying them new. BNSF announced a big locomotive order, and CSX is buying new locomotives, and these cost estimated $2.5 million each. He also pays close attention to headcount.
(7) CP shares sold off heavily when oil price dropped, more than other RR's, because everybody "knows" how it carries so much crude-by-rail which is supposed to be 10% of freight and irreplaceable.
(8) CP had a bad fourth quarter in 2013 because of a non-operating $240 million write-off for its disposal of the.western part of the Dakota, Minnesota & Eastern line. Many investors look at the trailing P/E ratio of 33.85x, and don't realize the distortion from the write-off.
That is a fascinating explanation. Is there a reason the tank car could not be vented to the atmosphere? Would the crude oil vaporize?
CSX conf call this AM:
Low oil prices have no effect in 2015 on frac sand and oil-by-rail in our markets, because the investments by the producers have already been made. Maybe in 2016, if prices for oil remain low, frac sand and oil-by-rail volumes may diminish, because the main investment for [shale oil production] is at the front end, and depends on the crude oil price.
Very cold in Chicago, but that hub has been operating "normal" for the last 11 weeks, which is outstanding! Much better compared with last winter.
Competition from trucking? Shortage of truck drivers is the big issue. Lack of capacity. Most people don't want their sons to grow up to be to be truck drivers--away from home for 5 days--drug testing--high cost to enter the business--our intermodal business is still growing.
We need more power to get better service levels, but we are unable to order any additional locomotives (?shortages), so we're repairing the ones we have. We will gradually improve service levels as the locomotives arrive.
Pricing for renewal business? "You will be very pleased when we report our numbers for first quarter of next year."
Lower fuel price does not affect operating ratio, because fuel is a pass-through expense--fuel surcharge cancels out much of the benefit-not a profit driver.