CP Rail Profit Trails Estimates After Outages, Derailments

Canadian Pacific Railway Ltd. reported quarterly profit that trailed analysts’ estimates after floods and derailments interrupted service and curtailed revenue growth at the country’s second-largest carrier.

Second-quarter net income more than doubled to C$252 million ($245 million) or C$1.43 a share, from C$103 million, or 60 cents, a year earlier, the company said today in a statement. That fell short of the C$1.50 average estimate, according to data compiled by Bloomberg. Operating ratio, an industry gauge of efficiency, improved to 71.9 percent from 82.5 percent.

Chief Executive Hunter Harrison has cut jobs, closed yards and run longer and faster trains in the past year in a bid to rid the company of its status as the least efficient North American railroad. As productivity increased, the company’s safety record has deteriorated, with five derailments in the second quarter. In the latest incident, a bridge buckled June 27 in Calgary after flooding inundated the city, triggering the derailment of rail cars loaded with petroleum products.

“To say it was a challenging quarter, given the number of incidents that affected this network, would be an understatement,” Chief Operating Officer Keith Creel said today on a conference call with analysts. There was “no commonality or systemic issues at the root cause” of the incidents, he said, stressing that derailments weren’t related to efforts by the company to cut back on assets.

PE Ratio

Canadian Pacific fell 2.1 percent to C$127.44 at the close of trading in Toronto. The shares have gained 26 percent this year, as larger rival Canadian National Railway Co. has advanced 13 percent.

“Operationally things are going quite well, but the stock is already discounting a substantial improvement in efficiency,” David Tyerman, an analyst at Canaccord Genuity, said in a telephone interview from Toronto. “When you’re richly valued, you have to do everything right all the time, and maybe this wasn’t right enough for the investment community.”

Tyerman has a hold rating on the stock.

Canadian Pacific’s price-to-earnings ratio of 24 is the second-highest among North America’s six largest publicly traded railroads, exceeding the industry average of about 19, Bloomberg data show. Only Kansas City Southern, with a ratio of 32, is more expensive.

‘Negative Trend’

Sales rose 9.6 percent to C$1.5 billion. Network disruptions linked to the floods cut revenue growth by about C$25 million, or 2 percent, Canadian Pacific said. Revenue for each ton of freight carried a mile, an industry benchmark, dropped about 1 percent.

“This is the second consecutive quarter in which CP has posted lower yields and this negative trend raises questions about the long-term sustainability of top-line growth,” Walter Spracklin, a Royal Bank of Canada analyst in Toronto, said in a note to clients. He rates the shares underperform.

Harrison today reaffirmed a full-year forecast that calls for “high-single digit” revenue growth in 2013, a jump of more than 40 percent in diluted per-share earnings and an operating ratio “in the low 70s.”

Still, Canadian Pacific’s operating ratio remains the worst among the six Class 1 North American railroads that have reported second-quarter results. Canadian National fared best, with a 60.9 ratio. The industry average was 67.7.

Cost Savings

Executives identified more than C$100 million in potential annual savings through a review of operations during the second quarter, Creel said.

Earnings in the latest period included more than C$30 million in so-called casualty costs stemming from incidents, Chief Financial Officer Brian Grassby said. That’s almost double the recent quarterly average, he said.

Average train speed rose 2 percent in the quarter while terminal dwell time, the length of time rail cars sit idle in yards, shrank 11 percent, according to a filing on the Canadian Pacific website. Train accidents jumped 24 percent to an average of 1.78 per million train-miles, Canadian Pacific said.

The railroad hasn’t reduced the number of employees who inspect its tracks, or its inspection standards, Creel said. Canadian Pacific wants to be the safest railway in North America, he said.

Canadian Pacific had a total workforce of 16,053 at the end of the quarter, 18 percent fewer than a year earlier. The figure will probably drop to about 15,500 by the end of 2013, the company said in a slide presentation on its website.

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