CALGARY - Canadian Pacific Railway (TSX:CP) had $400 million of net income in the third quarter — up 23 per cent from last year on higher revenue and improved efficiency but short of the profit growth that analysts had been anticipating.
Its revenue for the three months ended Sept. 30 totalled $1.67 billion, also up from a year earlier but short of estimates, while the company's operating ratio — a measure of efficiency — improved more than expected to a record low 62.8 per cent.
The quarter's $2.31 earnings per share was below the estimate of $2.35 per share while revenue was short of the $1.69 billion of revenue generally expected by analysts, according to Thomson Reuters data.
CP shares dropped $6.15 or 2.77 per cent to $215.50 in early trading after the Toronto Stock Exchange opened.
CanaccordGenuity analyst David Tyerman attributed the revenue miss to a smaller increase in prices than anticipated, although volumes were in line with his estimates. Tyerman also said in a research note that CP's profit margins were slightly below expectations, even though operating margin was better than expected
Desjardins analyst Benoit Poirier also said that CP's operating ratio was better than expected and suggested that the earnings miss was due to the impact of stock-based compensation, giving that the shares were up about C$40 in the quarter.
"Recall that CP's sensitivity to stock-based compensation is C$850,000 for every C$1 increase in the share price," Poirier wrote in a note ahead of the company's quarterly conference call.
The company has scheduled two calls for Tuesday. One at 9 a.m. MT (11 ET) and another at 11 a.m. MT (1 p.m. ET) to discusss the company's views on mergers and acquisitions within the North American rail industry.
Despite missing expectations, Canadian Pacific showed substantial improvements over its results in the third quarter of 2013. Net income was up $76 million or 23 per cent from $324 million, net income per diluted share was up 47 cents or 26 per cent from $1.84 and revenue was up $136 million or 8.7 per cent from $1.53 billion a year earlier.
"The CP team delivered another quarter of impressive results," said Hunter Harrison, CP's chief executive officer. "Despite recent volatility in commodity prices, we are confident in the strength of the franchise and are on track to finish the year with CP's strongest quarter to date."
Canadian Pacific confirmed Monday that talks with U.S. peer CSX Corp., which had been in the news for about a week, ended without a deal, putting a damper on the Calgary-based company's hopes for an expanded North American rail network.
CP said that no further talks are planned with CSX of Jacksonville, Fla. It did not say specifically why the "exploratory conversations'' ceased or when they ended, but noted that regulatory concerns generally appeared to be a "major deterrent'' to major railways joining forces.
CSX declined to comment on Monday. A report in the Wall Street Journal more than a week ago said CSX had rebuffed CP's overtures.
CP's network stretches from Vancouver to Montreal and the populous U.S. Northeast. Canadian Pacific also has an extensive network in the U.S. Midwest, including at the major rail hub through Chicago.
CSX's system also reaches Chicago and traverses much of the eastern United States from Florida to the U.S. border with Ontario.
