Canadian Pacific pulls back profit forecast after Q2 net falls 40 per cent

CALGARY — Canadian Pacific Railway Ltd. (TSX:CP) has pulled back its full-year profit forecast after delivering a 40 per cent decline in second-quarter earnings as surging fuel costs swelled operating expenses while the slackening economy flattened revenue.

Canadian Pacific said Tuesday it earned $155 million or $1 per share in the April-June period, down from $257 million or $1.64 per share in the year-ago quarter.

Revenue was essentially unchanged at $1.22 billion, while the railway's operating ratio – operating costs as a proportion of revenue – deteriorated to 79.4 per cent, from 74.7 per cent a year earlier.

"This was a tough quarter with the unprecedented rise in fuel prices, the North American economic downturn, and prolonged flooding on our U.S. mainline," commented CEO Fred Green.

"We see the current economic conditions continuing, and CP is taking aggressive steps which should position us well for 2009," Green added.

In releasing the quarterly results, Canadian Pacific cut its 2008 profit outlook "to reflect our substantially higher fuel assumptions and the deteriorating economic conditions."

The company now expects full-year adjusted diluted earnings per share of $4.00 to $4.20, down from its previous guidance of $4.40 to $4.60 despite an upgrade of forecast revenue.

Management predicts revenue will grow by six to eight per cent over last year, up from previous guidance of four to six per cent, "due mostly to increased fuel recovery, offset somewhat by volume declines."

Operating expenses are expected to increase by 11 to 13 per cent over 2007, revised from the earlier outlook of six to eight per cent, due principally to higher fuel costs.

The guidance reduction appears worse than expected, UBS analyst Fadi Chamoun wrote in a note to clients.

However, barring a further hit from the strong Canadian dollar or a new surge in diesel fuel costs, Chamoun sees CP at a turning point, "with pricing growth accelerating, fuel recovery improving, comps getting easier and (foreign exchange)/fuel headwinds moderating going into 2009."

Shares in the rail carrier declined 3.5 per cent, sliding $2.34 to $64.29 in morning trading on the Toronto Stock Exchange.