Canada Rail Stocks Reach Record as Profits Beat Estimates

Canadian Pacific Railway Ltd. and larger rival Canadian National Railway Co. surged to record highs after the companies reported third-quarter earnings that beat analysts’ estimates.

Shares of Canadian Pacific closed up 10 percent to C$148.53 in Toronto, the highest since the railway was spun off from its parent in 2001. Canadian National increased 4.4 percent to C$114.59, a record closing price since the company’s initial public offering in 1995.

Both companies benefited from growing demand to haul crude oil while bolstering operating ratio, a costs-to-revenue measure of railroad efficiency. After Canadian National yesterday reported a 17 percent increase in petroleum and chemicals sales, Canadian Pacific posted the same gain in industrials and consumer products revenue, which includes crude shipments.

“Crude by rail has a lot of torque to it,” said John Stephenson, a senior vice president at First Asset Investment Management Inc. in Toronto, which owns shares of both companies. “It’s been a strong contributor of revenue growth.”

Today’s share gains add about C$2.4 billion ($2.3 billion) in market value for Calgary-based Canadian Pacific and C$2 billion for Montreal-based Canadian National.

Net income in the quarter at Canadian Pacific jumped 45 percent to C$324 million, or C$1.84 a share, according to a statement today. Excluding C$7 million in income tax expenses, profit was C$1.88 a share, beating the C$1.71 average of 16 analyst estimates compiled by Bloomberg.

CFO Retirement

Revenue increased 5.7 percent to C$1.53 billion, Canadian Pacific reported. The company also said Chief Financial Officer Brian Grassby will retire at the end of the year. A search process is under way and announcement on a new CFO will probably be made shortly, according to the statement.

Canadian Pacific may carry 85,000 to 90,000 carloads of crude this year after moving 65,000 in the first nine months, Chief Marketing Officer Jane O’Hagan told analysts today on a conference call. The company is “on track” to reach a longer-term target of 140,000 to 210,000 annual carloads, she said.

Full-year revenue will probably climb 7 percent to 8 percent amid rising demand for commodities such as grains, crude and the sand used in hydraulic fracturing, O’Hagan said.

A goal of boosting sales by 5 percent to 7 percent annually in the next four years “is probably going to turn out to be a very conservative number,” Chief Executive Officer Hunter Harrison said.

‘More Efficient’

Canadian Pacific’s operating ratio narrowed to a record 65.9 percent in the third quarter from 74.1 percent a year earlier. Canadian National reported an operating ratio of 59.8 percent, a 0.8 percentage point improvement.

The railroad is running ahead of schedule on its plan to lower the operating ratio to 65 percent by 2016, and may provide new financial targets next year, Harrison said.

“Maybe it’s time to put another plan out that reflects the different base that we’re working off,” the CEO said.

Canadian Pacific “is quite simply becoming much more efficient,” Cameron Doerksen, an analyst at National Bank Financial in Montreal who rates the stock sector perform, said in a note. “The operational improvement is clearly occurring at a pace that is ahead of our expectations.”

Under Harrison, who took over in June 2012, Canadian Pacific has cut jobs, closed yards and run longer and faster trains to bolster profit and close the efficiency gap with Canadian National. He ran Canadian National from 2003 to 2009.

Job Cuts

Canadian Pacific has cut about 3,300 positions in the past year, or 18 percent of total staffing, resulting in savings of C$55 million, Grassby said. About 4,200 positions have been eliminated since July 2012, and the total may reach 4,500 by the end of this year, Harrison said.

The company now ranks third for efficiency among the six largest North American railroads that have reported third-quarter results, according to data compiled by Bloomberg. Canadian National is first, followed by Union Pacific Corp.

Operating expenses at Canadian Pacific fell 6 percent to C$1 billion in the third quarter, paced by an 11 percent decline in compensation and benefits and a 4.4 percent drop in purchased services. Fuel costs dipped 2.6 percent.

After closing yards and terminals, Canadian Pacific has identified about C$2 billion in “surplus assets” -- mostly land -- that it could sell or “optimize,” Harrison said, without being specific. The company will “take a strong, hard look” at a stock buyback in the next 12 months, he also said.

Stock Split

Canadian National, which has been wooing clients away from Canadian Pacific, plans to split its stock and buy back as much as C$1.4 billion of shares in the next year.

Profit excluding some costs and gains was C$1.72 a share in the third quarter, compared with C$1.52 a year earlier, the railroad said in a statement yesterday. Analysts on average had estimated C$1.62 a share, according to data compiled by Bloomberg. Revenue rose 8 percent to C$2.7 billion, ahead of the average estimate of C$2.65 billion.

Canadian National for three straight years now has announced a stock buyback in connection with its third-quarter results. A year ago, the company unveiled plans to buy as many as 18 million, or 4.8 percent, of its outstanding shares.

Separately today, Norfolk Southern Corp., the second-largest U.S. eastern railroad, posted third-quarter profit that topped analysts’ estimates because of rising shipments of steel, fracking sand and farm products.

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