CPKC Earnings Call: Margin Gains Trump Trade Headwinds

Canadian Pacific Kansas City Limited ((TSE:CP)) has held its Q4 earnings call. Read on for the main highlights of the call.

Canadian Pacific Kansas City Limited (CPKC) struck an optimistic tone on its latest earnings call, underscoring that structural operational gains and disciplined financial management are more than offsetting a patchy macro backdrop and tariff-related headwinds. Management leaned heavily on improving margins, record network performance and a strengthening grain and intermodal story to justify confident guidance for 2026, even as they acknowledged near-term softness in certain commodities and a tougher first quarter ahead.

Solid Quarterly Revenue and EPS Momentum

CPKC reported fourth-quarter revenue of $3.9 billion, up 1% year-over-year, with core adjusted diluted EPS climbing 3% to $1.33. While hardly breakneck growth, the results show the merged franchise is already generating incremental earnings despite a mixed demand environment and policy-related revenue drag. The modest top-line expansion paired with stronger earnings reflects tighter cost control and a more efficient network rather than pure volume strength.

Full-Year Growth Highlights Earnings Power of the Combined Network

For the full year, revenue reached $15.1 billion, a 4% increase, supported by 4% volume growth. Core adjusted diluted EPS rose a more robust 8% to $4.61, signaling that the combination of Canadian Pacific and Kansas City Southern is delivering operating leverage. Investors watching the integration story will note that CPKC is already converting modest volume growth into faster profit growth, an encouraging sign for a rail still early in its post-merger trajectory.

Industry-Leading Margin Improvement and Operating Ratio Gains

Margin improvement was a central theme. The company posted a Q4 core adjusted operating ratio (OR) of 55.9%, a 120-basis-point improvement year-over-year, and a full-year core adjusted OR of 59.9%, 140 basis points better. In a sector where every basis point is fought for, these moves underscore both the potential of the north-south network and management’s discipline. CPKC is positioning itself as an industry leader in efficiency, which, if sustained, supports ongoing EPS expansion even in a low-growth environment.

Record Operational and Safety Performance Underpins the Story

Operationally, CPKC delivered record metrics in train weight, train speed, locomotive productivity and car velocity, with the network now about 13% faster than pre-merger and car velocity nearly 14% higher. These gains are the tangible proof of integration benefits and network optimization. Safety also showed impressive full-year improvement, with FRA train accident frequency improving to 0.85, 16% better year-over-year, contributing to another year of record safety performance and reinforcing the company’s credibility with regulators and shippers alike.

Grain Strength Provides a Multi-Quarter Tailwind

Bulk and grain emerged as a key bright spot. CPKC delivered record grain revenues in Q4, up 4% on 2% higher volumes. Management highlighted an estimated Canadian harvest of roughly 85 million metric tons, about 20% above prior-year estimates, as a multi-quarter tailwind that extends into 2026. With its unique north-south reach to Gulf and Mexican export markets, CPKC is well positioned to capitalize on this bumper crop and drive sustained bulk volume growth.

Intermodal Momentum and New Service Corridors

Intermodal volumes and revenue are gaining traction. In Q4, intermodal revenue rose 3% on 4% volume growth, with international intermodal volumes up 5%. The company’s MMX service posted about 40% year-over-year growth, showcasing strong demand for the single-line Mexico–U.S.–Canada corridor. Management pointed to the new SMX service with CSX and a partnership with Americold as additional growth levers, framing 2026 as a year when intermodal should become a more powerful contributor to both volume and mix improvement.

Capital Discipline and Cash Returns to Shareholders

CPKC continued to stress capital discipline and shareholder returns. Net cash from operating activities reached $5.3 billion, up 1% year-over-year, giving management room to invest while returning capital. The company announced a new 5% share repurchase program for 2026 after completing prior buybacks, signaling confidence in intrinsic value. CapEx remains controlled, with the 2026 outlook trimmed about 15% to $2.65 billion, suggesting a more measured spending cadence without sacrificing key growth or safety initiatives.

Fleet Upgrades and Integration Synergies Building Earnings Capacity

The company is investing heavily in its locomotive fleet while extracting merger synergies. CPKC took delivery of 100 Tier IV locomotives in 2025 and plans to add another 100 in 2026, reinforcing network reliability and fuel efficiency. Integration synergies exiting 2025 are running at roughly a $1.2 billion run-rate, with a target to add about $200 million more by year-end 2026, reaching a $1.4 billion run-rate. These synergies underpin margin progress and help fund share repurchases and strategic growth projects.

Cost and Productivity Gains Cushion Inflation

Cost control was another recurring theme. Fuel expense declined 8% year-over-year, helped by both improved efficiency and the elimination of the Canadian federal carbon tax burden. Compensation and benefits were essentially flat versus the prior year, with productivity gains offsetting wage inflation—an impressive feat in a tight labor market. Purchased services and other expenses also moved lower thanks to productivity measures and insourcing, reinforcing the narrative that CPKC is finding room to protect margins even as it invests for growth.

Tariffs and Forest Products Weakness Weigh on Results

Not all segments fared well. Management cited tariffs and trade-policy headwinds as a notable drag, pegging the revenue impact at more than $200 million. Forest Products was particularly hard hit, with revenue down 13% and volumes down 12%, largely due to tariffs on Canadian lumber exports to the United States. These pressures highlight CPKC’s exposure to policy risk and the challenge of offsetting externally driven volume declines, even with a stronger network.

Automotive and Energy Markets Under Pressure

Automotive and energy-related traffic also weighed on performance. Automotive revenue slipped 3% despite a 1% increase in volumes, with the company citing a $30 million revenue headwind from production slowdowns, aluminum supply constraints and lingering chip shortages. Energy, chemicals and plastics revenue fell 3% on a 5% decline in volumes. The commentary suggests these markets remain fragile, meaning investors should temper expectations for a rapid rebound in these cyclical segments.

Export and Weather Bottlenecks Disrupt Grain Cadence

Despite the strong overall grain backdrop, exports were not immune to disruption. CPKC noted that export grain shipments lagged expectations in Q4, as heavy rain hampered vessel loading at Vancouver and farmers chose to store grain, dampening shipment volumes and sales cadence into early 2026. Management framed these issues as timing rather than structural, but they add volatility to quarterly performance and are a reminder that even strong end markets can be disrupted by weather and logistics.

Q4 Safety Setback Highlights Operational Risks

While full-year safety results were strong, the company acknowledged a deterioration in Q4 personal injury metrics. FRA personal injuries rose 22% in the quarter, with the injury rate climbing to 1.05. Management flagged this as an area of concern and focus, as sustained safety lapses can invite regulatory scrutiny, operational disruption and reputational risk. Investors will be watching closely to see if this proves to be a one-off setback or an early warning sign.

Near-Term Volume and Seasonal Headwinds in Q1

Management openly characterized the first quarter of 2026 as the toughest of the year. The company faces difficult comparisons against strong prior-year performance, seasonal weather events, and timing effects such as lapping pull-ahead volumes from earlier periods. Foreign exchange and the timing of carbon tax changes are also expected to weigh on cents-per-RTM metrics. The message to investors was to expect a softer start to the year, with improvements building as 2026 progresses.

CapEx Timing Variability and Investment Cadence

Capital spending patterns also came under scrutiny. CPKC’s 2025 CapEx of $3.1 billion exceeded its $2.9 billion outlook due to the pull-forward of maintenance projects. In 2026, CapEx is expected to drop to about $2.65 billion, roughly 15% lower, reflecting timing shifts rather than reduced commitment to the network. While this timing variability can affect near-term free cash flow optics, management framed it as part of a longer-term plan to balance reliability, growth investments and shareholder returns.

Regulatory and Trade Uncertainty Remains a Watch Item

The company also highlighted a range of external risks, including uncertainty around U.S. trade policy and the USMCA framework, potential tariff changes and broader regulatory questions such as reciprocal switching and M&A scrutiny. These factors could influence volumes, pricing power and competitive dynamics over time. While CPKC did not signal any immediate regulatory shocks, management’s comments serve as a reminder that policy risk is a structural overhang for cross-border rail operators.

Guidance: Confident 2026 Outlook Despite a Tough Q1

Looking ahead, CPKC guided to mid-single-digit RTM (volume) growth and low double-digit core EPS growth in 2026, anchored by continued operating-ratio improvement. Management reiterated a long-term ambition to improve OR by roughly 100 basis points per year, assuming steady execution. The company forecast a 2026 core adjusted effective tax rate of about 24.75%, CapEx of approximately $2.65 billion (down around 15% from prior expectations), and the addition of another 100 Tier IV locomotives after taking delivery of 100 in 2025. A new 5% share-repurchase program and a target for strong free cash conversion—near 75% in the near term and approaching 90% over the longer term—underline the emphasis on both growth and returns. These goals build directly off 2025’s performance, including 4% volume growth, a 59.9% core adjusted OR and 8% core EPS growth.

In closing, CPKC’s earnings call painted a picture of a railroad that is executing well on the factors it can control—efficiency, network performance, disciplined capital allocation and synergy capture—while navigating external pressure from tariffs, regulatory uncertainty and choppy demand in certain segments. The tone from management was candid about near-term challenges but clearly bullish on the medium-term opportunity, especially in grain and intermodal. For investors, the story remains one of steady margin improvement, growing free cash flow and a unique north-south franchise that appears increasingly well positioned to benefit when macro and policy winds shift in its favor.