CALGARY – The potential dismantling of NAFTA is a concern because of its impact on the overall North American economy, but its direct effect on Canadian Pacific Railway (TSX:CP) would be limited, CEO Keith Creel said Thursday.
Transportation analysts have identified the end of the North American Free Trade Agreement, as sometimes threatened by U.S. President Donald Trump, as one of the biggest risks to Canadian railways this year. Negotiations to modernize the deal start again next week in Montreal.
“We’re paying attention to it but, at a micro level, our direct commodity exposure is fairly modest,” Creel said on a conference call with analysts after reporting fourth-quarter financial results that slightly beat analyst expectations.
“Thirty per cent of our business is cross-border, but this number overstates our true exposure,” said Creel. “Our cross-border is primarily agricultural products — stuff like grain, potash, fertilizers, chemicals … The reality is the U.S. relies heavily on these raw materials that we’re shipping south to support the overall economy.”
St. Louis-based analyst Dan Sherman of Edward Jones said he agrees with Creel.
“We need the wood, we need the potash. Those things are important for us,” Sherman said. “So we’re probably going to continue to buy it from Canada, and if there’s a slightly larger tariff, that’s going to make hardly any difference.”
Analyst Kevin Chiang of CIBC World Markets said in a report earlier this month that a U.S. government move to disband the continental free trade agreement could cause a similar reaction to the immediate 10 per cent drop in market values in the aftermath of the Brexit vote in the United Kingdom.
CP Rail said Thursday that fourth-quarter revenue grew by five per cent to $1.71 billion from $1.64 billion in the same period a year ago, aided by enhanced service offerings and strategic partnerships with customers.
It said net income rose to $984 million in the last three months of the year from $384 million a year earlier. That was mainly due to a non-cash provision of $527 million to account for deferred income tax recoveries from U.S. tax reforms enacted in December, which more than made up for tax increases by the Saskatchewan and B.C. governments.
Freight revenue from metals, minerals, and consumer products grew 30 per cent, while energy, chemicals and plastics jumped 20 per cent.
Chief marketing officer John Brooks said on the call he expects 2018 revenue growth in “the mid-single digits” and adjusted earnings per share growth in the low double-digits, thanks to strong global potash demand, a large Canadian grain crop and steady coal shipments.
Sherman said he’s also bullish on CP Rail’s prospects, noting it has more capacity to grow than its competitors.
CP Rail says its operating ratio, a measure of operating expenses as a percentage of revenues, fell slightly to 56.1 per cent in the fourth quarter from 56.2 per cent in the year-earlier period. It was 57.4 per cent for 2017, down from 58.6 in 2016.
For the year, revenue was $6.55 billion in 2017, compared with $6.23 billion in 2016.
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