Ackman’s Canadian Pacific Plan Bolstered Amid Proxy Fight
Canadian Pacific Railway Ltd. (CP)’s operating expenses consumed less revenue when Fred Green became chief executive officer than in this year’s first quarter, the last earnings period before shareholders vote on investor William Ackman’s bid to replace him.
Operating costs rose to 80.1 percent of sales in the quarter from 79.4 percent in the same period in 2006, a month before Green took the top job. Canada’s second-largest carrier said today that profit more than quadrupled to C$142 million, or 82 cents a share, from C$34 million, or 20 cents.
The deteriorating ratio lends ammunition to Ackman as he argues for replacing Green with Hunter Harrison, who formerly ran rival Canadian National Railway Co. (CNR) Ackman’s Pershing Square Capital Management LP owns 14 percent of Canadian Pacific and is waging a proxy battle to install seven nominees on the railroad’s 16-member board at a May meeting.
Operating ratio is a standard for measuring profit among North American railroads. While Canadian Pacific has become the least-efficient of the region’s large carriers during Green’s tenure, the railroad improved train speed and other efficiency measures last quarter as it follows a plan to boost profit.
The operating ratio improved 1,050 basis points from 90.6 percent in the same period last year, when the Calgary-based company saw profit tumble amid foul weather.
The measure “remained somewhat elevated,” Chris Wetherbee, a New York-based analyst with Citigroup Inc., said in a note to clients. That “seemingly implies that improvement is beginning but more progress is possible.”
Ackman said today that the first-quarter operating ratio includes a $12 million insurance benefit and $4 million from land sales, which the company didn’t have last year. Those give the metric a 120 basis-point benefit, he said in an interview.
The results come “during what some people described as the best winter in 100 years in Canada,” Ackman said by telephone. “They report as progress improvement compared to the worst winter in Canada’s history.”
Comparing this year’s operating ratio to the measure posted six years ago doesn’t account for “the significant impact of rising fuel prices over the last several years,” said Ed Greenberg, the railroad’s spokesman.
Canadian Pacific gained 0.6 percent to C$76.45 at the close of trading in Toronto. The shares have climbed 11 percent this year.
The company said last week it would post profit of 80 cents to 83 cents a share. Sales rose 18 percent to $1.38 billion, buoyed by gains in intermodal, grain, coal and automotive shipments. That topped the average estimate of C$1.32 billion from 17 analysts in a Bloomberg survey.
“I didn’t expect to see them regaining business the way they did, said Jeff Kauffman, an analyst with Sterne Agee & Leach Inc. ‘‘It’s hard to tell what’s recapturing from bad weather a year ago versus what’s real operating change, but I think the pleasant surprise was the volume.”
Canadian Pacific’s operating ratio has exceeded 79.4 percent in every first quarter since Green became CEO as the economic crisis weighed on volumes and an avalanche and flooding snarled operations, causing the rail carrier to lose market share.
“Our results are more than favorable weather conditions,” Green said on a conference call after earnings were released. Performance in the quarter “was anchored on fundamental improvements in our operations. Fuel efficiency, employee productivity, equipment rents and purchased services all moved in the right direction.”
Under the multi-year plan that Green is implementing, the rail carrier expects to improve its operating ratio to 70 percent to 72 percent for 2014 and 68.5 percent to 70.5 percent for 2016, Greenberg said.
Rates and the profitability mix of cargo types improved more than 5 percent in the first quarter, and most of that gain was from core price increases, Chief Marketing Officer Jane O’Hagan said on the call. The company expects “inflation-plus” pricing throughout the year, she said.
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