Canadian Pacific Climbs as Earnings Rise More Than Fivefold

Canadian Pacific Railway Ltd. (CP) rose the most in three months as Canada’s second-largest railroad said fourth-quarter profit more than quintupled and Chief Executive Officer Hunter Harrison vowed to stay on until 2016.

Net income surged to C$82 million ($74 million), or 47 cents a share, from C$15 million, or 8 cents, a year earlier, the Calgary-based company said today in a statement. Earnings per share for 2014 will rise 30 percent or more from last year, or the equivalent of at least C$8.35, Canadian Pacific said. The average of analysts’ estimates compiled by Bloomberg was C$8.39.

Since taking over in June 2012, Harrison has cut jobs and shut rail yards to bolster profit and close the operations gap with larger rival Canadian National Railway Co. (CNR), his former employer. Canadian Pacific today reported record operating ratio, a costs-to-revenue measure of efficiency, for the last quarter and said it expects more improvement this year.

“This was a solid quarter, with decent operating numbers,” Jason Seidl, a Cowen & Co. analyst in New York who rates the shares market perform, said in a telephone interview. “The guidance is for a minimum of 30 percent growth. This year they did much better than their original guidance, so if they do that again this year, they will be well above the consensus.”

A year ago, the company forecast a 40 percent increase for 2013 from adjusted earnings per share of C$4.34, implying a goal of C$6.08. Last year’s actual profit on that basis was C$6.42.

Canadian Pacific jumped 4.3 percent to C$165 at the close in Toronto, the biggest single-day increase since Oct. 23. The stock has gained 2.7 percent this year.

Not Leaving

The 69-year-old Harrison, who came out of retirement to become Canadian Pacific’s CEO, insisted he still plans to lead the company for another two years before handing the reins to Chief Operating Officer Keith Creel.

“This looks like it’s going to be a long good run,” Harrison said on a conference call. “Sometime in the 2016 time frame, and I’m not locked into that number, that would be probably when we would look at the exit strategy of me leaving and Keith taking over. So I’m going to be here for a while.”

Canadian Pacific’s adjusted operating ratio improved to a record 65.9 percent in the quarter from 74.8 percent a year earlier, and the company said today it’s targeting 65 percent or lower this year. Harrison had told investors in December 2012 that the company would probably require four years to reach the 65 percent goal.

The railroad will probably announce new five-year targets at a meeting with analysts in September, Harrison said today.

Most Efficient

By year-end, Harrison said he wants Canadian Pacific to become the most efficient railroad in North America. Montreal-based Canadian National, which is scheduled to report fourth-quarter results tomorrow, led all rivals with a 59.8 percent ratio in the third quarter.

“This is just a little internal goal of ours, but I think by year-end we will be in the lead as far as efficiency” is concerned, Harrison said. “There’s a lot of runway left here, barring any issues that we can’t predict.”

Operating expenses in the quarter increased 3.5 percent to C$1.49 billion as fuel costs rose 2.3 percent to C$262 million, Canadian Pacific said today. Materials costs were up 8.3 percent to C$65 million.

Dakota Sale

The quarterly results included an impairment charge of C$257 million stemming from the sale of the western part of the Dakota, Minnesota & Eastern line. Canadian Pacific announced the transaction on Jan. 2, and said today the sale will generate gross proceeds of about $215 million.

Revenue rose 7 percent to C$1.61 billion, Canadian Pacific said. The company forecast a 2014 sales increase of 6 percent to 7 percent. The average estimate of analysts for this year was C$6.61 billion, implying an increase of about 8 percent.

“Revenue guidance may be disappointing to some, but CP is clearly executing on its margin story and seeing better yield growth than the other rails,” Scott Group, an analyst at Wolfe Research in New York, said in a note today to clients. He rates the shares outperform.

Analysts such as Group and Fadi Chamoun at BMO Capital Markets said they expect the company to distribute cash to shareholders in 2014 by buying back stock.

Canadian Pacific had C$476 million in cash and equivalents as of Dec. 31, up from C$333 million a year earlier.

Cash Options

The company “is clearly in the strongest cash position and free-cash generation position in its history,” Chief Financial Officer Bart Demosky said today on the call. Demosky joined the company about a month ago from Suncor Energy Inc.

Canadian Pacific is “taking a very close look” at its options, and will be discussing what to do “in very short order,” Demosky said, adding that he is “not a fan of sitting on idle cash.”

The company is “way ahead of schedule, and I would think that by this next call at the end of the end of next quarter, we will have some pretty definitive responses to what we are going to do and how,” Harrison said.

Canadian Pacific had 14,977 employees at the end of December, an 11 percent decline from a year earlier.

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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