Canadian Pacific Surges on Ackman-Backed Plan for Rebound

Canadian Pacific Railway Ltd. surged the most in six weeks after Chief Executive Officer Hunter Harrison said he would cut jobs and study asset sales to boost profitability at North America’s least-efficient railroad.

Canadian Pacific rose 4.1 percent to C$96.82 at the close in Toronto, the highest since the company was spun off from the former Canadian Pacific Ltd. in 2001.

Harrison plans to shrink the company’s workforce by 23 percent and will consider selling a midwestern U.S. line gained in the 2007 acquisition of Dakota, Minnesota & Eastern Railroad. The former head of Canadian National Railway Co. stepped into his current post in June after hedge-fund manager William Ackman won a proxy fight to oust then-CEO Fred Green.

“If you’re a shareholder even since the beginning of 2012, I think you’re very happy with what Ackman has done and what Hunter is doing,” Brian Yarbrough, an Edward Jones analyst, said in a telephone interview. “He’s got the track record to do it and now he’s laying out his plans.”

Harrison earned a reputation for operational efficiency at Illinois Central Corp. and then at Canadian National, the country’s biggest railroad, before retiring in 2009. Canadian Pacific’s shares have climbed 32 percent from June 28, the day before his hiring was announced. Canadian National rose 3.7 percent in that span.

Operating Efficiency

Harrison, 68, reaffirmed yesterday his pledge to lower Calgary-based Canadian Pacific’s operating ratio, a benchmark industry measure of expenses to revenue, to about 65 percent in four years. The CEO’s speech kicked off a two-day presentation to investors and analysts.

“We need to get our house in order, get our costs under control and do a lot of things,” he said in an interview today.

While the carrier’s 74.1 percent third-quarter ratio was the lowest in two years, Canadian Pacific was still the least efficient of the six major North American railroads, according to data compiled by Bloomberg.

To achieve his goals, Harrison will eliminate 2,300 employee and contractor jobs by the first quarter, and 4,500 total by 2016.

“You could see more reductions in the future,” Harrison said. “I’m not locking us into any place. We’re in a pretty good position where the demographics of what we describe as our natural attrition over the four years would be about 5,700 people.”

‘CP’s Turn’

Canadian Pacific will also explore options for its real estate holdings and relocate its downtown Calgary headquarters to offices at a local rail yard by 2014, according to a statement released before Harrison’s speech yesterday.

The railroad plans to introduce a new sidings program that will allow it to use fewer trains while maintaining or even increasing volumes.

“It’s CP’s turn for the operating turnaround,” Steven Paget, a Calgary-based analyst at FirstEnergy Capital Corp., said in a phone interview. “It’s CP’s time.”

Paget has an outperform rating on Canadian Pacific, while Edward Jones’s Yarbrough, who is based in St. Louis, has a buy recommendation.

Ackman pushed for Harrison’s hiring as he sought to boost investor returns at the 131-year-old company. His Pershing Square Capital Management LP became the carrier’s largest shareholder in 2011 and held a 14 percent stake at the end of the third quarter, according to data compiled by Bloomberg.

DM&E Assessment

As strategy changes take place in the next four years, the company’s operating ratio may fall to as low as 63 percent or may come in closer to 67 percent, depending on revenue growth, Harrison said yesterday. Offering a range rather than a definitive target “in no way is to try to indicate that we’re not confident about this number,” he said.

The company forecast annual revenue growth of 4 percent to 7 percent by 2016, a good portion of which Harrison said would come from increasing shipments of crude oil.

In addition to considering selling one of the U.S. lines from the DM&E deal, Canadian Pacific plans to delay indefinitely acting on an included option to expand into the Powder River Basin, the largest U.S. coal reserve. The entire $1.48 billion acquisition was criticized earlier this year by Ackman, who called it a blunder.

Whether DM&E was a good investment at the time or not, the investment “has not played out like some would have liked,” Harrison told investors and analysts today.

Interest has already been expressed in the line, which includes about 660 miles (1,060 kilometers) of track from Minnesota through South Dakota, Nebraska and Wyoming, Harrison said. The company currently has no plans to divest other assets acquired through the DM&E transaction, he said.

“Change is certainly in the air,” Walter Spracklin, a Toronto-based analyst at Royal Bank of Canada, wrote in a note to clients today.

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