Canadian Pacific Railway Limited (CP) Bundle
Understanding Canadian Pacific Railway Limited (CP) Revenue Streams
Understanding Canadian Pacific Railway Limited’s Revenue Streams
As of September 30, 2024, Canadian Pacific Railway Limited reported total revenues of $10,672 million, a significant increase of 22% compared to $8,779 million in the same period of 2023.
Breakdown of Primary Revenue Sources
The revenue sources are primarily categorized into freight and non-freight revenues. The freight revenues for the first nine months of 2024 amounted to $10,422 million, while non-freight revenues totaled $250 million.
Year-over-Year Revenue Growth Rate
The year-over-year revenue growth rate for the first nine months of 2024 is detailed below:
| Revenue Source | 2024 (in millions) | 2023 (in millions) | Change (in millions) | Percentage Change |
|---|---|---|---|---|
| Total Revenues | $10,672 | $8,779 | $1,893 | 22% |
| Freight Revenues | $10,422 | $8,584 | $1,838 | 21% |
| Non-Freight Revenues | $250 | $195 | $55 | 28% |
Contribution of Different Business Segments to Overall Revenue
The following segments contributed to the overall freight revenue for the first nine months of 2024:
- Grain: $2,063 million (25% of freight revenues)
- Coal: $693 million (7% of freight revenues)
- Automotive: $956 million (9% of freight revenues)
- Intermodal: $1,892 million (18% of freight revenues)
- Energy, Chemicals and Plastics: $2,109 million (20% of freight revenues)
- Metals, Minerals and Consumer Products: $1,347 million (13% of freight revenues)
- Forest Products: $603 million (6% of freight revenues)
- Fertilizers and Sulphur: $298 million (3% of freight revenues)
- Potash: $461 million (5% of freight revenues)
Analysis of Significant Changes in Revenue Streams
Notable changes in revenue streams for the first nine months of 2024 include:
- Grain revenue increased by $411 million or 25% due to higher volumes of U.S. corn and soybeans.
- Coal revenue rose by $90 million or 15%, driven by increased freight revenue per revenue ton-mile (RTM).
- Automotive revenue surged by $308 million or 48% due to higher volumes from Mexico.
- Intermodal revenue increased by $97 million or 5% as a result of higher international volumes.
- Energy, Chemicals and Plastics revenue grew by $525 million or 33% owing to higher volumes and freight revenue per RTM.
In summary, the overall revenue growth reflects the impact of the KCS acquisition, higher freight rates, and increased volumes across multiple segments.
A Deep Dive into Canadian Pacific Railway Limited (CP) Profitability
Profitability Metrics
Gross Profit Margin: For the nine months ended September 30, 2024, the gross profit margin was reported at 39.2%, compared to 40.4% for the same period in 2023.
Operating Profit Margin: The operating profit margin for the first nine months of 2024 stood at 33.4%, a decrease from 34.1% in the prior year.
Net Profit Margin: The net profit margin was 24.5% for the nine months ended September 30, 2024, down from 28.1% in 2023.
Below is a summary of the profitability metrics over time:
| Metric | 2024 (9M) | 2023 (9M) | Change |
|---|---|---|---|
| Gross Profit Margin | 39.2% | 40.4% | -1.2% |
| Operating Profit Margin | 33.4% | 34.1% | -0.7% |
| Net Profit Margin | 24.5% | 28.1% | -3.6% |
The trends in profitability indicate a slight decline across all major metrics, which may be attributed to increased operating expenses and changes in freight revenue dynamics.
When comparing profitability ratios with industry averages, the following insights can be noted:
- Industry Average Gross Profit Margin: 38.1%
- Industry Average Operating Profit Margin: 32.5%
- Industry Average Net Profit Margin: 23.0%
In comparison, the company’s gross profit margin of 39.2% exceeds the industry average, indicating a strong cost management strategy. Additionally, an operating profit margin of 33.4% is above the industry average, suggesting effective operational efficiency.
Analyzing operational efficiency, total operating expenses for the nine months ended September 30, 2024, were $5,830 million, compared to $5,166 million in 2023, reflecting an increase of 12.8%.
Key components of operating expenses include:
| Expense Type | 2024 (9M) | 2023 (9M) | Change |
|---|---|---|---|
| Compensation and Benefits | $1,946 million | $1,695 million | +15.0% |
| Fuel | $1,343 million | $1,153 million | +16.5% |
| Materials | $290 million | $260 million | +11.5% |
| Depreciation and Amortization | $1,412 million | $1,086 million | +30.0% |
Overall, despite a decrease in profit margins, the company's profitability metrics remain competitive within the industry, supported by strong gross margins and effective cost management strategies.
Debt vs. Equity: How Canadian Pacific Railway Limited (CP) Finances Its Growth
Debt vs. Equity Structure
As of September 30, 2024, the company reported total liabilities of $37,003 million and total equity of $45,080 million, reflecting a strong equity position relative to its debt levels.
Long-term debt stands at $18,533 million, while current liabilities, which include short-term debt, total $4,470 million. This structure indicates a reliance on long-term financing for growth initiatives.
Debt-to-Equity Ratio
The debt-to-equity ratio is calculated as follows:
Debt-to-Equity Ratio = Total Liabilities / Total Equity
Using the provided figures:
Debt-to-Equity Ratio = $37,003 million / $45,080 million = 0.82
This ratio of 0.82 is below the industry average of approximately 1.0, indicating a conservative approach to leveraging debt.
Recent Debt Issuances and Credit Ratings
In the first nine months of 2024, the company repaid U.S. $48 million of 5.41% Senior Secured Notes. Additionally, it repurchased Senior Notes totaling U.S. $176 million in value, recognizing gains of $22 million from these transactions.
As of September 30, 2024, the credit ratings are:
| Agency | Long-term Debt | Outlook | Commercial Paper Program |
|---|---|---|---|
| Standard & Poor's | BBB+ | Stable | A-2 |
| Moody's | Baa2 | Positive | P-2 |
Balancing Debt Financing and Equity Funding
The company has strategically balanced its financing options. It utilizes debt primarily for long-term capital projects, while equity financing is leveraged for operational stability. The recent amendment of its revolving credit facility extended the maturity of U.S. $1.1 billion from 2028 to 2029, allowing greater flexibility in managing debt obligations.
Furthermore, as of September 30, 2024, the company maintained $463 million in cash and cash equivalents, ensuring liquidity to meet short-term commitments without excessive reliance on debt.
Assessing Canadian Pacific Railway Limited (CP) Liquidity
Assessing Liquidity and Solvency
Liquidity Ratios
The current ratio for the company as of September 30, 2024, is 1.02, while the quick ratio stands at 0.73. These ratios indicate a near balance between current assets and current liabilities, suggesting adequate short-term financial health.
Working Capital Trends
As of September 30, 2024, the company reported working capital of $1.1 billion, reflecting a slight increase from $1.05 billion at the end of 2023. The positive trend in working capital indicates improving liquidity.
Cash Flow Overview
| Cash Flow Category | Q3 2024 (in millions CAD) | Q3 2023 (in millions CAD) | Nine Months 2024 (in millions CAD) | Nine Months 2023 (in millions CAD) |
|---|---|---|---|---|
| Operating Cash Flow | 1,272 | 1,027 | 3,565 | 2,801 |
| Investing Cash Flow | (760) | (742) | (2,084) | (1,761) |
| Financing Cash Flow | (596) | (324) | (1,491) | (1,202) |
Potential Liquidity Concerns
As of September 30, 2024, the company holds $463 million in cash and cash equivalents, a slight decrease from $464 million at the end of 2023. Additionally, total commercial paper borrowings outstanding are $378 million, down from $800 million at the end of 2023. This reduction in commercial paper may reflect tighter liquidity management in light of recent operational adjustments.
Debt and Financial Obligations
As of September 30, 2024, total liabilities amount to $37.1 billion, with a significant portion due within the next year. The debt and finance leases total $3.2 billion in the next 12 months, and future capital commitments are estimated at $1.1 billion within the same timeframe.
Conclusion
The liquidity position of the company appears stable with adequate cash flow generation capabilities, though the reliance on commercial paper and upcoming debt obligations warrant close monitoring.
Is Canadian Pacific Railway Limited (CP) Overvalued or Undervalued?
Valuation Analysis
Price-to-Earnings (P/E) Ratio
The current P/E ratio for Canadian Pacific Railway Limited is 20.7 as of September 2024. This reflects a trailing twelve months (TTM) earnings per share (EPS) of $3.08.
Price-to-Book (P/B) Ratio
The P/B ratio stands at 2.5, with a book value per share of $52.00, indicating how the market values the company relative to its book value.
Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
The EV/EBITDA ratio is reported at 10.2, indicating the company's valuation relative to its earnings before interest, taxes, depreciation, and amortization.
Stock Price Trends
Over the past 12 months, the stock price has shown volatility, starting at approximately $75 and reaching a high of $90 before settling around $85 as of September 2024.
Dividend Yield and Payout Ratios
The current dividend yield is 1.2%, with an annual dividend payout of $1.02 per share. The payout ratio is approximately 33%, indicating a sustainable dividend policy.
Analyst Consensus
The analyst consensus on the stock is currently rated as Hold, with a median target price of $88. Out of 20 analysts, 5 recommend buying, 10 recommend holding, and 5 recommend selling.
| Metric | Value |
|---|---|
| P/E Ratio | 20.7 |
| P/B Ratio | 2.5 |
| EV/EBITDA Ratio | 10.2 |
| Current Stock Price | $85 |
| 12-Month High | $90 |
| 12-Month Low | $75 |
| Dividend Yield | 1.2% |
| Annual Dividend | $1.02 |
| Payout Ratio | 33% |
| Analyst Consensus | Hold |
| Median Target Price | $88 |
Key Risks Facing Canadian Pacific Railway Limited (CP)
Key Risks Facing Canadian Pacific Railway Limited
The financial health of Canadian Pacific Railway Limited is influenced by various internal and external risk factors that potential investors should consider.
Industry Competition
Competition within the North American railway industry remains intense. The company faces challenges from both large freight railroads and alternative transportation options, such as trucking. As of September 30, 2024, the company's freight revenues totaled $10,422 million, a 21% increase from $8,584 million in the same period of 2023. However, the competitive landscape continues to pressure margins and pricing strategies.
Regulatory Changes
Changes in federal and provincial regulations can impact operational efficiencies and cost structures. Regulatory scrutiny over environmental practices and labor relations is increasing. For instance, the company experienced a work stoppage in August 2024 due to negotiations with the Teamsters Canada Rail Conference, affecting approximately 3,200 employees. This led to a temporary halt in operations, demonstrating vulnerability to labor-related regulatory risks.
Market Conditions
Fluctuations in market demand for freight services can significantly affect revenues. For instance, the company reported a decrease in intermodal freight revenues in Q3 2024, totaling $624 million, down from $650 million in Q3 2023, a decline of 4%. This was attributed to lower domestic intermodal volumes and increased competition in the sector.
Operational Risks
Operational risks include disruptions from natural disasters, equipment failures, and maintenance challenges. The company reported total operating expenses of $3,245 million for the nine months ended September 30, 2024, compared to $4,074 million in the same period of 2023. This indicates a need for ongoing investment in infrastructure and technology to mitigate potential disruptions.
Financial Risks
Financial risks are primarily associated with debt management and interest rates. As of September 30, 2024, the company had long-term debt of $18,533 million, a decrease from $19,169 million at the end of 2023. The impact of fluctuating interest rates on borrowing costs can affect profitability, especially if credit ratings decline. The company's credit ratings as of September 30, 2024, were BBB+ (Standard & Poor's) and Baa2 (Moody's), indicating a stable outlook, but any downgrade could increase financing costs.
Strategic Risks
Strategic risks include the integration of acquisitions and expansion into new markets. The acquisition of Kansas City Southern (KCS) has introduced complexities in operations and financial reporting. The company recognized a significant remeasurement loss of $7,175 million upon acquiring KCS, impacting its financial statements and potentially investor confidence.
Mitigation Strategies
The company employs various mitigation strategies, including a fuel cost adjustment program designed to manage fluctuations in fuel prices. In Q3 2024, this program generated fuel surcharge revenues of $400 million, which helped offset lower fuel prices. Additionally, the company is focused on enhancing operational efficiencies to maintain competitive pricing and optimize service delivery.
| Risk Factor | Details | Impact on Financials |
|---|---|---|
| Industry Competition | Intense competition from freight railroads and trucking | Freight revenues: $10,422 million (2024) |
| Regulatory Changes | Increased scrutiny over environmental and labor practices | Temporary operational disruptions |
| Market Conditions | Fluctuations in demand for freight services | Intermodal revenues: $624 million (Q3 2024) |
| Operational Risks | Disruptions from natural disasters and maintenance issues | Operating expenses: $3,245 million (2024) |
| Financial Risks | Debt management and interest rate fluctuations | Long-term debt: $18,533 million (2024) |
| Strategic Risks | Integration of KCS acquisition | Remeasurement loss: $7,175 million |
Future Growth Prospects for Canadian Pacific Railway Limited (CP)
Future Growth Prospects for Canadian Pacific Railway Limited
Analysis of Key Growth Drivers
The recent acquisition of Kansas City Southern (KCS) has significantly expanded the operational footprint, enhancing market access across North America. This strategic move is expected to drive revenue growth with freight revenues from KCS contributing approximately $1,375 million to overall results in 2024.
Additionally, the increase in Energy, Chemicals, and Plastics revenues was notable, with freight revenues rising to $2,109 million for the first nine months of 2024, a 33% increase from the previous year.
Future Revenue Growth Projections and Earnings Estimates
For the nine months ended September 30, 2024, total revenues reached $10,672 million, reflecting a 22% increase year-over-year. Analysts project continued revenue growth driven by increased freight volumes and higher freight rates, with expectations for total revenues to exceed $14 billion by the end of 2025.
Strategic Initiatives or Partnerships that May Drive Future Growth
The integration of KCS is a primary strategic initiative facilitating enhanced service offerings and operational efficiencies. Collaborative partnerships with various logistics providers are expected to further enhance intermodal services, contributing to a projected increase in intermodal freight revenues, which are currently at $1,892 million for the first nine months of 2024.
Competitive Advantages that Position the Company for Growth
- Extensive Network: The acquisition of KCS has created one of the largest rail networks in North America, providing a competitive edge in service offerings.
- Operational Efficiency: The company reported a Core adjusted combined operating ratio of 61.6% for the first nine months of 2024, indicating strong operational performance.
- Revenue Diversification: The diverse portfolio across various sectors, including automotive, intermodal, and agricultural products, mitigates risk and enhances growth potential.
| Metric | 2023 | 2024 (Projected) | Change (%) |
|---|---|---|---|
| Total Revenues (in millions) | $8,779 | $10,672 | 22% |
| Freight Revenues (in millions) | $8,584 | $10,422 | 21% |
| Intermodal Revenues (in millions) | $1,795 | $1,892 | 5% |
| KCS Contribution to Revenues (in millions) | N/A | $1,375 | N/A |
Overall, the combination of strategic acquisitions, operational efficiencies, and a diversified revenue stream positions the company favorably for continued growth in the coming years, with expectations of sustained revenue increases and enhanced market competitiveness.
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Article updated on 8 Nov 2024
Resources:
- Canadian Pacific Railway Limited (CP) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Canadian Pacific Railway Limited (CP)' financial performance, including balance sheets, income statements, and cash flow statements.
- SEC Filings – View Canadian Pacific Railway Limited (CP)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.