(Reuters) - Canadian Pacific Railway Ltd reported a better-than-expected quarterly profit on Wednesday, as it earned more from higher shipments of commodities, but executives were cautious on grains for the second half of the year.
North American railroad operators, who have faced pressure from volatile commodity prices, are beginning to see profits beat expectations, driven by higher volumes.
Revenue from grain shipments, the biggest contributor to the rail operator’s total revenue, jumped 20.2 percent to C$363 million in the second quarter ended June 30.
Chief Executive Keith Creel said he is likely to only update Canadian Pacific’s (CP) full year guidance after the third quarter because of uncertainty over factors like grain crops, given dry weather conditions.
CP has targeted high single-digit adjusted diluted earnings growth in 2017.
CP Chief Marketing Officer John Brooks said he expects Canada’s second largest railroad will feel the impact of the dry conditions in North Dakota, as uncertainty grows in southern Alberta and Saskatchewan.
“We just don’t know what’s going to happen with grain,” Creel said.
Drought conditions, which have hit crops in the northern United States, has sent buyers looking to Canada for high-protein wheat to make bread, although Canadian provinces have also been hit by dry weather.
“That may present actually a market opportunity for us to push more wheat into the US from our Canadian franchise,” Brooks said of high protein wheat.
Brooks said the trends toward revenue ton-miles (RTM) growth in CP’s bulk franchise like potash and coal “look fairly strong” for the second half of 2017.
“As long as volume growth continues to be positive, Canadian Pacific’s marketing efforts and efficient network should translate those volumes into solid earnings growth,” wrote Edward Jones analyst Dan Sherman in a note to clients.
Operating ratio, which measures operating costs as a percentage of revenue, fell 330 basis points to 58.7 percent and CP expects it will improve in 2017, on an annual basis.
The lower the ratio, the more efficient the railroad.
CP’s net income rose to C$480 million ($381 million), or C$3.27 per share in the second quarter, from C$328 million, or C$2.15 per share, a year earlier.
CP earned C$2.77 per share, beating analysts’ average estimate by 5 Canadian cents, according to Thomson Reuters I/B/E/S.
The Calgary-based company’s total revenue climbed 13.3 percent to C$1.64 billion, which also edged past analysts’ estimates of C$1.63 billion.
($1 = 1.2591 Canadian dollars)
Reporting By Allison Lampert in Montreal and Ahmed Farhatha in Bengaluru; Editing by Sai Sachin Ravikumar and Diane Craft