Earnings wrap: a big quarter for Heartland; CP survives labor disruptions

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Canadian Pacific (NYSE: CP) turned in solid numbers despite needing to shut its rail network down twice in anticipation of a strike.

The first time, there was no strike; the second time, the strike didn't even last a day. But shutting down the network before those incidents, and then bringing it back up afterward has an impact on the bottom line.

"As you can imagine, winding down the railway the start, to stop winding back up the railway certainly created some inconvenience, some disruptions and additional cost and some slowed momentum so to speak for that process that had an influence to the quarter relative to cost," Keith Creel, Canadian Pacific's CEO, said about the quarter. The transcript of the CP earnings call was provided by SeekingAlpha.

Though it was a "headwind" in the second quarter, Creel said he expected the labor stability--for a company that has experienced more than its share of labor tensions--will be a "tailwind" going forward once the Teamsters ratifies the contract agreed upon by labor and management.

What was notable about the Canadian Pacific earnings results and call, coming a day before the Union Pacific call where management came in for some thinly-veiled criticism, is that at first glance CP did not perform notably better than Union Pacific. CP said its second quarter operating ratio was 64.2%, which was 140 basis points more than the second quarter of 2017. Analysts were unhappy with a Union Pacific OR of 63%. However, any look at the CP numbers needs to take into account the disruption of the system created by labor. While UP’s stock price took a hit Thursday after its earnings call, CP was up $3.66, or 1.9%, to close at $192.87 on as day when broader market indices were down 0.4% to 0.5%.

CP management has been targeting an OR in the low 60's, and one analyst questioned how it could get there. "We didn't get a chance to realize our full productivity, (because) both in April and in May we had to take the network down two times and that stop/start really has an impact on the overall productivity," CFO Nadeem Velani said on the call. "So, we saw some gains, but we would have seen a lot more."

Much as UP executives said on their call, new employees going through training are seen as a key part of reaching the OR goal. "We're kind of prepaying on that investment to get a return on our labor productivity in the back half of the year that we're absorbing those costs as we speak, and we see the benefits of that later in the year," Velani said.

And similar to UP, the size of the price increases that CP said it was getting also was questioned. John Brooks, CP's chief marketing officer, said "same-store" pricing was "in the high end of our 3% to 4% targeted range."

Further pressed on the size of those relatively modest increases, Brooks said that renewals in the quarter were "more sort of north of that 4% on renewals." CP's grain business is one of its largest, and prices to move grains are under government regulation; a 2.8% increase is set for August 1. Beyond that, "some of that pricing in the markets that we shift to is pretty competitive, but certainly there's an opportunity to sort of carry a fair amount of that momentum as we look into Q3 and Q4.”

Among the reporting highlights in the CP earnings, revenue ton miles were up 4% and carloads were up 2%. Total revenue was up 7%, but reported diluted EPS was C$3.04, down 7% from a year earlier. However, adjusted diluted EPS was C$3.16, up 14% from the year before.

All that resulted in a drop in net income to C$436 million, down from C$480 million in the second quarter of last year.

Intermodal revenue was up to C$360 million from C$338 million last year. "With truck capacity continuing to tighten and the anticipation of a strong fall peak, we expect both our international and domestic Intermodal to perform quite well for the remainder of the year," Brooks said.

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Heartland Express (NASDAQ: HTLD) had a strong second quarter, though its own enviable operating rate moved in the wrong direction from a year ago…but in the right direction following a big acquisition.

The company's second quarter OR was 85.8% and 83.4% on an adjusted basis. The corresponding numbers for the second quarter of 2017 were 83.6% and 81.4%.

But in the company's earnings statement--it does not do a phone call with analysts--CEO Michael Gerdin touted the fact that the quarterly ORs were the best since Heartland acquired Interstate Distributor Co. early in the third quarter of 2017. The improvement in the ORs "(shows) continued improvement over the last three quarters following the acquisition along with increased earnings."

Beyond that, the report was positive. Besides fuel costs, there were two significant increases in expenses for the company: labor costs rose to $57.5 million from $48.6 million a year ago, and purchased transportation--which for most companies means where they turn to independent owner operators to move freight when their own network can't handle the demand--was $5.4 million compared to $1.8 million a year ago.  However, the rent & purchased transportation figure for the second quarter was less than the first quarter expenditure of $6.125 million. And labor costs in the first quarter were higher at $62 million. Heartland managed to cut those expenses during a time of a labor squeeze.

Net income was up to $17.8 million from $14.6 million in the second quarter of 2017 and $13.3 million in the first quarter of this year.  Investors liked what they heard, taking the stock up Thursday by $1.42 to $19.93, a gain of 7.67%.

Heartland recently announced a pay increase in a public manner that was somewhat unusual. In the earnings statement, Gerden said it was the company's second in 10 months.

CFRA analyst Jim Corridore raised its 12-month target on Heartland's stock price to $21 from $19. In a note announcing the change, Corridore said: "We think HTLD has made some improvement since the acquisition of Interstate Distributor in July of 2017, which led to sharply higher costs. At the same time, industry demand has improved markedly, which should allow for higher revenues and volumes over the next year. However, we remain concerned about rising labor costs and continued driver shortages which have the potential to disrupt operations and continue to drive cost pressures."