Canadian Pacific Soars Most Since October on Profit Gain

Canadian Pacific Railway Ltd. (CP) surged the most in six months after reporting first-quarter profit that beat analysts’ estimates, as a drop in benefits and compensation spending helped blunt weather-related costs.

The shares of Canada’s second-biggest railroad rose 5.3 percent to C$172.62 by 4 p.m. in Toronto, the biggest increase since October. The shares gained 7.5 percent this year, beating the 6.9 percent increase of the benchmark Standard & Poor’s/TSX Composite Index.

Chief Executive Officer Hunter Harrison managed to exceed estimates by overseeing a decrease in operating expenses, including an 8.3 percent reduction in the workforce. He maintained his goal of a full-year profit increase of at least 30 percent, saying the company has “the utmost confidence” in its ability to reach the target.

“This was as tough a quarter operationally as CP is going to see,” Jeff Nelson, an analyst at Edward Jones & Co., said in a telephone interview from St. Louis. “The fact they were able to grow through that maybe gives people the green light to get excited about the rest of the year, with an improving economy and the cost takeout story that’s continuing. People can now look forward.”

Net income rose 17 percent to C$254 million ($231 million), or C$1.44 a diluted share, the Calgary-based company said in a statement. That beat the C$1.41 average of estimates in a Bloomberg survey of 23 analysts. Revenue increased 0.9 percent to C$1.51 billion.

Unseasonably cold weather in the first three months of 2014, with temperatures falling to as low as minus 37 degrees Celsius (minus 35 Fahrenheit) in central Canada, forced Canadian Pacific to run slower trains. The company said in a slide presentation that winter-related costs cut first-quarter profit by 30 cents to 35 cents a share.

Slower Trains

Average train speed dropped 12 percent to 15.9 miles per hour, while average dwell time -- the length of time rail cars sit idle in yards -- jumped 56 percent to 10.3 hours.

Canadian Pacific’s rail network, which suffered “exceptional stress” as a result of the extreme cold, is about four weeks away from “regaining fluidity,” Chief Operating Officer Keith Creel said.

“Our work is not done,” Creel said today on a conference call. “To the point that winter is over, as far as the weather, the challenges associated with it are not.”

Operating ratio, an industry benchmark that compares expenses to revenue, improved by 380 basis points to 72 percent. Harrison is targeting an operating ratio of 65 percent or lower in 2014, a forecast the company reiterated today.

“There are a lot of positive things going on here,” Harrison said. “Is the potential there for 63? Yes, the potential is there. It’s a matter of timing. There are a lot of moving parts.”

Since taking over in June 2012, Harrison has cut jobs and closed rail yards to bolster profit and close the efficiency gap with larger rival Canadian National Railway Co. (CNR)

Canadian Pacific had 14,774 people in its workforce at the end of March, down from 16,108 a year earlier.

Grain Increases

Canada’s federal government last month introduced minimum requirements for the movement of grain by Canadian Pacific and Canadian National to help ease a backlog that has left billions of dollars of crops stuck on prairie farms -- a decision that Harrison and Creel repeatedly criticized today.

Even as winter hampered operations, Canadian Pacific moved 15 percent more Western Canadian grain in February and 20 percent more in March, Creel said. Canadian Pacific is now exceeding the minimum volume threshold set out in the legislation, he said.

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

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net Molly Schuetz, John Lear

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