Canadian Pacific Kansas City Looking Good Rolling Into Earnings (NYSE:CP)

Canadian Pacific Kansas City Limited (NYSE:CP) announces earnings on 1/30/2024 after the market closes. The consensus among analysts predicts an EPS of $0.83 and revenue of $2.74 billion. There have been 20 revisions downwards and 2 revisions upwards in the past 90 days. The railway industry is very interesting, even if you’re not directly invested because the earnings can provide a “real-time” glimpse into how the broader economy is doing. I will get into analysts’ expectations, and my own EPS forecast, and explore potential strategies to capitalize on this earnings announcement.

Canadian Pacific beat last quarter’s earnings, but it recorded 5/12 misses in the last 3 years.

Revenue shows a typical profile, proving harder to beat for management, and the company is missing 8/12 of the last quarters:

When I go back over the earnings data until 2018, a typical picture emerges:

• Average EPS Surprise: 0.35% (Slightly above forecasts on average).
• Average Revenue Surprise: 0.03% (Revenue was marginally higher than forecasted on average).

The company was reporting better than expected earnings 12/19 times. On revenue, the company beat analyst forecasts only 10/19 times.

The range of analyst estimates for EPS varies from $0.77 and $0.86. Revenue estimates vary from $2.64 billion to $2.85 billion between 24 analysts.

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I’ve been working on estimates using a blend of different models, including time series analysis, and incorporating existing analyst forecasts, among other things. However, I also apply some common sense and fudge numbers a bit if there’s a good reason to do so; if a large buyback program has just been announced or some other major influence that won’t be predicted by historical data.

At the end of the day, getting the earnings right doesn’t matter that much. What’s interesting is how CP’s share price will do during and in the wake of the earnings event. The average share price response to the earnings events is positive and approximately 0.68%.

Here is a table illustrating the subsequent stock price movements on Canadian Pacific earnings events going back decades:

I expect CP to beat on earnings and slightly miss on revenue. It has a history of missing on revenue. I don’t think a slight revenue miss (often the largest decliners) is going to spook the markets.

Following the vast majority of earnings, the share price went somewhere in-between 3% down and 2% up.

Looking at the options chain in light of the typical share price responses, it seems interesting to me to go long a call spread by buying an $80 call on February 15th and selling a $82.5 call on the same expiry. This seems quite far out of the money, given the expected volatility through earnings, but there’s still a trading week to go before earnings. I don’t expect a terrible earnings call and the average return of the earnings event alone is around ~0.70%. It should break even on a 2.5% move upwards. At $82.5 the profit per contract is maxed out at $170 vs. a max loss of $80.

It is not a high probability winner, but my analysis leads me to believe there is a positive expected value. If I didn’t want to mess around with options, and were long the stock, I’d lean more towards increasing my position than selling out.