CPKC (CP) Q3 2026 Earnings: Fuel Lifts Operating Ratio, Buybacks Outrun Cash

CPKC (CP) Q3 2026 earnings showed volume growth finally accelerating, while the operating ratio rose again and share buybacks still ran ahead of free cash. Canadian Pacific Kansas City reported the July-September quarter on October 28, 2026, in an 8-K earnings release and on its earnings call [1][2]. The prior questions were whether the new crop year's grain shipments could outweigh falling coal volumes, whether costs outside the fuel pass-through would let the operating ratio improve again, and whether free cash could cover buybacks and dividends. Network volume rose 6%, grain set a record and the coal decline narrowed to 11%, which largely answers the first question [1]. The core adjusted operating ratio, however, rose 120 basis points year over year, and the company attributed 190 basis points to fuel prices; free cash improved sharply but covered only about 60% of buybacks and dividends [1]. Overall, growth and profit dollars improved, while margins and the funding of buybacks remain unproven.

CPKC is the only freight railway spanning Canada, the United States and Mexico, with a network of about 20,000 miles [3]. It hauls grain, coal, chemicals, automobiles and containers, and nearly all revenue comes from freight charged on volume and rate per ton-mile, plus a fuel surcharge that moves with diesel prices. Railroads carry high fixed costs, so the operating ratio (operating expenses as a share of revenue) usually improves when volume grows.

Operating ratio worsened for a third quarter, driven mainly by fuel and stock-based pay

The core adjusted operating ratio was 61.9% in the third quarter, up 120 basis points from a year earlier, and it missed management's earlier goal of getting below 60% in the second half [1]. The company disclosed that higher fuel prices worsened this ratio by 190 basis points. The average fuel price was US$4.49 per gallon, up 53%, and fuel expense rose 61% to C$667 million [1]. Because the fuel surcharge passes cost through to shippers, it raises revenue and expense together while adding little profit, which mechanically pushes the ratio up.

Excluding the fuel impact, simple subtraction puts the operating ratio at about 60.0%, roughly 70 basis points better than 60.7% a year earlier; this is an estimate, not a company-disclosed figure [1]. Management said the fuel price change made a modest positive contribution to earnings, but surcharge timing lags and diesel crack spreads were a drag, and the dollar amount awaits the quarterly report [2]. Labor was the other pressure point. Compensation and benefits were C$711 million, up 13% on an FX-adjusted basis, faster than the 7% growth in workload (gross ton-miles); stock-based compensation alone was C$39 million versus C$4 million a year earlier, and the increase equals roughly 80 basis points of operating ratio [1].

Efficiency measures show the railroad itself running better. Average employees fell 1%, train speed rose 8%, terminal dwell fell 7%, purchased services rose only 3% on an FX-adjusted basis, and casualty costs declined [1][2]. Core adjusted operating income was C$1.608 billion, up 11.7%, and core adjusted diluted EPS rose 16% [1]. Personal injury frequency, however, rose 20%, which could affect future casualty costs [1]. Management expects a fourth-quarter operating ratio below 60%, while noting that fuel remains a year-over-year headwind [2].

Free cash flow improved sharply, but borrowing still fills the buyback gap

Third-quarter adjusted free cash was C$1.018 billion, compared with C$415 million a year earlier [1]. The improvement came from operating cash flow rising to C$1.550 billion and capital spending falling to C$613 million; working capital contributed about C$100 million, which may not repeat [1]. Management kept its plan for full-year capital spending of about C$2.65 billion, 15% less than last year, and C$2.035 billion had been spent through the first three quarters [1][2].

In the same quarter, CPKC spent C$1.425 billion on buybacks and C$236 million on dividends, a combined C$1.661 billion. Free cash covered about 61% of that, up from about 21% a year earlier [1]. Commercial paper filled the gap, with net issuance of C$711 million in the quarter. Adjusted net debt to adjusted EBITDA was 3.2 times at September 30, unchanged from mid-year and from a year earlier [1]. Net debt grew 7.5%, faster than EBITDA's 5.2%, so leverage did not fall, and the company issued another C$1.8 billion of notes on October 6 [1].

Conclusion

The quarter confirmed growth in volume and in profit dollars. The deterioration in the operating ratio can be attributed mainly to the fuel pass-through and stock-based compensation, and railroad efficiency kept improving. Part of the growth came from carry-out stocks after last year's record harvest; management estimates this year's Canadian crop at about 76 million to 78 million metric tons, below last year, so it is not yet clear whether high grain growth will continue [2]. Cash generation improved clearly, but buybacks still rely on borrowing and leverage held at 3.2 times. The next key evidence is whether the fourth-quarter operating ratio falls below 60% and keeps improving after excluding fuel, and whether free cash covers buybacks and dividends with year-end leverage falling to 3.1 times or lower.

Sources

[1] CP 8-K filed 2026-10-28 Exhibit 99.1 (Q3 2026 earnings release), 2026-10-28, CPKC, 8-K, https://www.sec.gov/Archives/edgar/data/16875/000001687526000031/exhibit991-q32026earningsr.htm [2] CP Q3 2026 earnings call 2026-10-28 · transcript (Drillr earning_call_summary.content), 2026-10-28, CPKC earnings call transcript, drillr:earning_call_summary/CP/2026-10-28 [3] CP 10-K filed 2026-02-26 · company overview, 2026-02-26, CPKC, 10-K, https://www.sec.gov/Archives/edgar/data/16875/000001687526000008/