Investment In Intermodal A Prudent Move by Canada Pacific
Canada Pacific Railway's (CP) decision to increase its focus on intermodal freight is part of its wider diversification strategy to decrease its reliance on freighting commodities. We believe that the substantial growth in domestic intermodal freight, together with the projected increase in European imports in the wake of the new FTA between Canada and Europe, will stimulate container traffic growth, and rising fuel prices will make rail a cheaper, quicker option compared with road haulage. Moreover the company is well placed to capitalise on this boom due to its extensive intermodal network, and stands to benefit from higher revenues and general profitability of the intermodal segment. However, we note potential short-term risks in the form of the sluggish economy, subdued consumer spending, and declining international intermodal traffic.
Over Q413, CP's profits amounted to US$82mn (up from US$15mn in Q412), derived from revenues of US$1.6bn (up by over 7%). This made FY2013 profits US$875mn, a y-o-y increase of 81%, from revenues of US$6.1bn. The company anticipates a further 6%-7% increase in profits y-o-y over 2014. Total intermodal volumes grew by a mere 0.4% over Q4, with a 1% decline in revenues to US$335mn. FY2013 intermodal volumes were down almost 2%, to just over 1mn carloads, and revenues dropped by 3% to US$1.33bn.
CP announced that based on its Q4 financial results, it will be targeting domestic intermodal traffic as a key growth segment in the future, as the sector saw a significant uptick in revenues and traffic. This compensated for the overall suppressed growth due to falling international traffic in the wake of the loss of significant contracts to its rival Canadian National Railways. It is this substantial drop in its cross-border intermodal traffic to the US which accounts for the overall limited Q4 growth in intermodal volumes and decline in revenues generated by this segment over 2013. This slump would have been far worse if it had not been offset by the growth in domestic intermodal traffic, and we expect this divergent trend to continue, as domestic intermodal cargos show increasingly strong growth.
|Declining International Traffic Drags Down Intermodal|
|CP Intermodal Volume & Revenue y-o-y growth (%) Q413, FY2013|