Tuesday, Canadian Pacific Railway Ltd. (CP, CP.TO) reported a sharp drop in its second-quarter profit, impacted by significantly lower foreign exchange gains and marginal growth in revenue. Additionally, adjusting for its higher fuel assumptions and the deteriorating economic conditions, the company lowered its adjusted earnings per share guidance for the full year. However, due to increased fuel recovery, the company has raised its full-year revenue forecast.
A weak North American economy and prolonged flooding on US mainline pulled down the second-quarter net income by 39.7% to C$154.9 million from C$256.7 million in the year-ago quarter. Earnings per share dropped 39% to C$1.00 from C$1.64 in the prior-year quarter.
The transcontinental railway company said it had a foreign exchange gain on long-term debt of only C$7 million, or C$5 million after-tax, in the second quarter of 2008. For the second quarter of 2007, the gain was significantly higher at C$89 million or C$65 million after tax.
Income prior to foreign exchange gains and losses and other specified items declined 14% to C$150.4 million from C$174.8 million in the previous-year quarter. Adjusted earnings per share decreased 13.4% to C$0.97 from C$1.12 in 2007.
The Calgary, Canada-based company's total revenues for the quarter were C$1.220 billion, essentially flat with C$1.216 billion posted in the comparable quarter of last year. Second-quarter freight revenues increased nearly 2% to C$1.193 billion, despite a decrease in traffic, mainly due to pricing, inclusive of fuel recoveries.
The company noted that it experienced strong growth in industrial and consumer products at 17%, intermodal at 9%, and coal at 6%. However, the growth was offset by a 21% decline in forest products, 9% in grain, 5% in sulfur and fertilizers, and 2% in automotive.
For the six months ended June 30, Canadian Pacific reported net income of C$245.7 million, down 36% from C$385.3 million in 2007. Earnings per share declined to C$1.59 from C$2.46 in the prior-year period. Year-to-date revenue increased to C$2.367 billion from C$2.331 billion in the year-ago period.
Looking ahead, Canadian Pacific said it is revising its full year 2008 forecast to reflect its considerably higher fuel assumptions and the deteriorating economic conditions. The company now expects to report full-year adjusted earnings per share of C$4.00-C$4.20, lower than its earlier guidance of C$4.40-C$4.60.
Total revenue is foreseen to grow by 6%-8% in 2008, up from prior forecast of 4%-6%, primarily due to increased fuel recovery offset somewhat by volume declines.
Total operating expenses are expected to increase by 11%-13%, up from previous guidance of 6%-8%, mainly due to higher fuel costs. Also, free cash is predicted to be around C$150 million, which has been adjusted downwards from the previous outlook of approximately C$200 million, due to lower projected earnings.
The full-year estimate, according to the company, assumes an average currency exchange rate of the U.S. dollar at par with the Canadian dollar and an average price of US$121 per barrel for crude oil.
CP is currently trading on the NYSE at $62.51, down $4.04, or 6.07%, on a volume of 229,791 shares.
On the Toronto stock exchange, CP.TO is currently trading at C$62.99, down C$3.64, or 5.46%, with a volume of 453,987 shares.
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