CP Meets Estimates as Ackman CEO Boosts Efficiency

Canadian Pacific Railway Ltd. posted fourth-quarter earnings that matched analysts’ estimates as the chief executive officer backed by investor William Ackman targets profitability goals set during a proxy fight.

Excluding some items, profit was C$1.28 a share, in line with the average of 28 estimates compiled by Bloomberg. Profit on that basis in the same period a year ago was C$1.11. Revenue rose 6.7 percent to C$1.5 billion ($1.49 billion), Calgary-based Canadian Pacific said today in a statement.

Chief Executive Officer Hunter Harrison is working to rid Canadian Pacific of its status as North America’s least efficient railroad, based on operating ratio. Harrison, a former CEO of rival Canadian National Railway Ltd., took over June 29 after Ackman, a hedge-fund manager and activist investor, won his proxy campaign to remove then-CEO Fred Green.

“We continue to expect material improvement in efficiency, productivity and earnings, but the share price move has gone beyond that,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said yesterday in a telephone interview.

On an adjusted basis, the operating ratio, an industry benchmark that compares expenses to sales, improved to 74.8 percent from 78.5 percent a year earlier, Canadian Pacific said.

Revenue Forecast

Canadian Pacific predicted a revenue increase “in the high single digits” this year. Operating ratio will probably be “in the low 70s,” while diluted per-share earnings climb by more than 40 percent. That implies a forecast of C$6.08 a share, based on 2012 results, topping analysts’ estimates of C$5.78 a share.

“This was driven entirely by a material reduction in the company’s pension-expense assumptions,” Spracklin said in a note to clients today. “We are at this point uncertain as to how much value the market will ascribe to the change in pension expense assumptions -- which we note are set at the discretion of management.”

Canadian Pacific rose 3.1 percent to an all-time closing high of C$116.22 in Toronto. The stock has gained 15 percent this year, outpacing an advance of 3.2 percent by Canada’s benchmark Standard & Poor’s/TSX Composite Index. (SPTSX)

Forecasts for 2013 assume that fuel will cost $3.45 a gallon, on average, the company said. Canadian Pacific expects to pay a tax rate of 25 percent to 27 percent.

Pension expenses will probably be C$50 million to C$60 million this year and next, before rising to C$90 million to C$110 million in 2015 and 2016, Canadian Pacific said.

Including C$39 million in workforce-reduction expenses, C$111 million to write down investments such as the Powder River Basin coal reserve’s rail network and other items, net income fell 93 percent to C$15 million, or 8 cents a share, from C$221 million, or C$1.30, a year earlier. The operating ratio on that basis was 96 percent.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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