Ackman-Backed CEO Pushes CP Rail Profit Above Estimates

Canadian Pacific Railway Ltd. posted higher first-quarter earnings than analysts estimated as Chief Executive Officer Hunter Harrison makes progress on profitability goals set during last year’s proxy fight.

Net income rose 53 percent to C$217 million ($211.6 million), or C$1.24 a share, compared with the C$1.22 average of estimates in a Bloomberg survey. Revenue gained 8.6 percent to C$1.5 billion, the Calgary-based railroad said today.

Harrison, a former CEO at larger rival Canadian National Railway Co., has cut jobs, closed yards and run longer trains as he works to end Canadian Pacific’s stint as the least efficient North American railroad. He took over in June after a proxy fight led by William Ackman, a hedge fund manager and the railroad’s largest shareholder, to oust Harrison’s predecessor.

“CP showed impressive improvement,” Cameron Doerksen, an analyst at National Bank Financial, said today in a note to investors. “The company is on track to potentially exceed our current 2013 forecast.”

Doerksen predicts the company will earn C$6.33 a share, higher than both the company’s C$6.08 forecast and analysts’ average estimates of C$6.19.

Canadian Pacific’s operating ratio, an industry measure of efficiency that compares expenses to revenue, improved 430 basis points from a year earlier to 75.8 percent.

Building Momentum

“With a very strong start to the year and momentum quickly building, I am now even more confident that we are on pace toward the best year-end financial and operating performance in CP’s history,” Harrison, who was backed by Ackman for the post of CEO, said in the statement.

The 132-year-old railroad predicted a yearly revenue increase “in the high single digits” in January along with 40 percent earnings growth. It’s ahead of schedule on both counts, the CEO said today.

Canadian Pacific is also running ahead on its plan to lower its operating ratio to “the low 70s” by year-end, Harrison said. The railroad’s four-year plan calls for the operating ratio to drop to “the mid-60s.”

While Canadian Pacific’s operating ratio still ranks last among the six Canadian and U.S. railroads that have reported first-quarter results, the gap has narrowed. Norfolk Southern Corp. is the second-least efficient of the six railways, with a ratio of 74.8, data compiled by Bloomberg show.

‘Largely Expected’

Canadian Pacific fell 1.2 percent to C$124.73 today in Toronto. Through yesterday’s close, the railroad had gained 72 percent since Harrison took over, while Canada’s benchmark Standard & Poor’s/TSX Composite Index returned 0.9 percent.

While “strong,” Canadian Pacific’s first-quarter results were “largely expected by the market as weekly performance data pointed to solid execution throughout the winter despite more challenging operating conditions,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said today in a note to clients.

Including part-time staff, contractors and consultants, Canadian Pacific had 16,108 employees at the end of the quarter, the company said in a filing on its website. That’s 2,837 employees, or 15 percent, fewer than a year earlier.

Canadian Pacific is on pace to top a previously announced goal of cutting 4,500 jobs by 2016, and may eliminate as many as 6,000 positions, Harrison said today on a conference call.

Crude Oil

The company has already eliminated 3,400 jobs, or three-quarters of its target, Chief Financial Officer Brian Grassby said. The tally will probably reach 4,000 by the end of 2013, according to the CEO.

“The 4,500 is not the ceiling,” Harrison said. “Will we exceed 4,500? I think so, yes. Will we get to 6? Could be. I don’t quite have line of sight on this yet.”

First-quarter revenue growth was fastest in industrial and consumer products, which include crude oil, up 25 percent from a year ago, Canadian Pacific said today. Fertilizer and sulfur sales gained 21 percent.

Demand for oil is such that Chief Marketing Officer Jane O’Hagan said today that Canadian Pacific may be able to achieve a run-rate of 140,000 crude carloads by the end of 2015. The railroad carried 53,500 carloads of crude oil last year, a 19-fold increase from 2010.

Crude oil “remains the strongest opportunity” for revenue expansion, O’Hagan said. “This growth momentum continues as loading network expands, our destination network diversifies and shippers commit to the crude-by-rail model.”

Separately, plans to sell the Dakota, Minnesota & Eastern Railroad are proceeding and Canadian Pacific has received “strong interest” for the assets, Grassby said.

“In short order, we are going to be deciding the next steps and narrowing down the number of people we are going to be talking to,” he said.