Big loss for CPR in the Globe Today.
Higher fuel prices, a weak economy and flood damage to its U.S. mainline drove quarterly profit at Canadian Pacific Railway Ltd. 40 per cent lower.
“Combined, these had a significant impact on CP's earnings,” chief executive officer Fred Green stated. “We see the current economic conditions continuing, and CP is taking aggressive steps which should position us well for 2009. I have accelerated a rigorous process to improve our productivity, efficiency, and yield.”
Profit was $155-million, or $1 a share, compared to $257-million, or $1.64 a share, a year ago, in line with analyst expectations. Revenue was flat, at $1.22-billion.
Chief financial officer Mike Lambert cautioned that the worst was not yet behind the railway as he lowered the company's full-year profit guidance to $4 to $4.20 a share, down from $4.40 to $4.60.
“We continue to focus on driving positive pricing gains and strengthening our fuel recovery and cost management programs,” Mr. Lambert said in a statement. “However, these will not be enough to offset the challenges we are facing with the higher price of fuel and the slowing North American economy. We are updating our guidance to reflect our substantially higher fuel assumptions and the deteriorating economic conditions.”
The new full-year estimate assumes the Canadian dollar will hover around par with the greenback, and the price of oil averages $121 (U.S.) a barrel at the end of the year. Earlier forecasts had pegged the average price of oil at $98 a barrel.
“CP strives to mitigate the impact of any changes [in the price of oil] through fuel recovery programs,” the company said in a statement, adding that every $2 increase in a barrel of oil shaves a penny off the company's earnings per share. “However, these programs do not completely offset the changes in expense caused by changes.”
Floods wreaked havoc on the company's Minneapolis-Chicago line, which resumed partial service at the end of June after rains closed it for two weeks. The company rerouted up to 15 trains a day, said Longbow Research analyst Lee Klaskow.
“Trains are constrained to their own networks, so they are vulnerable to things like floods, earthquakes, accidents along their routes. And rerouting costs a lot in terms of time and money,” Mr. Klaskow said.
Price increases bumped freight revenue by almost 2 per cent. Shipments of forest products were hurt by continued weakness in the U.S. housing market, down 21 per cent. Grain loads were down 9 per cent, sulphur and fertilizers down 5 per cent and automotive loads decreased by 2 per cent. Industrial and consumer products increased by 17 per cent and coal was 6 per cent higher.
Operating expenses were up 7 per cent, with fuel costing the railway 34 per cent more than expected in the quarter.
BB&T Capital Markets analyst John Barnes downgraded CPR earlier this month, and said the economic challenges are simply too much for the railway to overcome in the short term.
“If our forecasts are correct, CP will miss the Street's estimates for the next several quarters,” Mr. Barnes wrote in a note to clients. “Even if our forecasts prove overly conservative, we believe material earnings growth will be very unlikely given the weak domestic economy, coupled with rising costs and foreign exchange headwinds.”
Meanwhile, Canadian National Railway posted an 11 per cent drop in second-quarter earnings Monday. The company left its 2008 earnings forecast in place, but warned that fuel costs and a higher dollar are acting as a drag on profits.