December 5, 2012 / 4:58 PM / 5 years ago

CP Rail shares climb as savings from job cuts seen

* CP shares rise 4 pct on TSX

* Railway reducing assets, cutting 4,500 jobs

* CP executives detail efficiency plan in New York

TORONTO, Dec 5 (Reuters) - Shares of Canadian Pacific Railway pushed 4 percent higher on Wednesday, a day after the railroad announced a turnaround plan that includes sweeping job cuts that could save about C$500 million ($503 million) over the next four years.

The stock’s rally extended a gain of nearly 30 percent it had made since hard-driving railway veteran Hunter Harrison was appointed chief executive in June after CP’s largest shareholder, Pershing Square Capital Management Ltd, won a bruising proxy battle with the company’s former management.

Harrison - who on Tuesday outlined key points in a plan that will eliminate about 23 percent of CP’s jobs in four years - said his turnaround plan would allow Canada’s second-largest railway to thin out its assets and use them more efficiently.

“We’re going to reduce the number of assets required; we’re going to do more with less. We’re going to make those assets really sweat,” Harrison told analysts in New York on Wednesday as the company spelled out details of the plan.

Analysts said the overhaul appears a credible strategy to revive the fortunes of CP, whose operating efficiency is the North American industry’s worst.

“CP’s targets are largely as expected and we believe that management and Hunter Harrison specifically have laid out a very credible plan,” said National Bank Financial analyst Cameron Doerksen. “We also believe that CP’s new management team fully backs Hunter Harrison’s plan. Our issue with the stock continues to be valuation.”

CP stock rose C$3.72, or 4 percent, to C$96.72 on the Toronto Stock Exchange on Wednesday morning.

A turnaround has largely been priced into CP’s stock, said Doerksen, who has an “underperform” rating and C$84 target on the shares.

JOB REDUCTIONS

The most dramatic change at CP will come from job cuts as the company eliminates 4,500 of its 19,500 jobs by 2016 through reductions and attrition. The company said it will cut 1,700 positions by year-end.

Harrison has said that about 28 percent of CP’s staff is in non-unionized management positions. “This group was ... very top-heavy. We did a lot of things, and a lot of decisions were made, in that glass tower in Calgary that in my view should be done in the field,” he said.

The staff cuts represent savings of C$253 million by the end of the year on an annualized basis, and C$495 million over the next four years, estimated BMO Capital Markets analyst Fadi Chamoun in a note.

CP, which expects to lower its operating ratio to the mid-60s by 2016, from 74.1 percent in the third quarter, has already closed four train classification yards, three intermodal terminals and shed executives.

Operating ratio, which measures operating expenses as a percentage of revenue, is the rail industry’s gold standard to measure efficiency. CP had the worst ratio of North America’s six biggest railroads in the most recent quarter.

To reach its operating ratio, CP expects compound annual revenue growth of 4-7 percent, cash flow of C$900 million to C$1.4 billion and annual capital spending to C$1 billion to C$1.1 billion.

Senior executives from CP’s operations unit said they are working more efficiently, making faster decisions and bigger changes now that Harrison has removed layers of bureaucracy and red tape from the organization.

A new network design is already showing results, said Scott MacDonald, senior vice-president of operations.

Since July, for example, the company has eliminated the need for 195 locomotives and 3,200 leased rail cars. Meanwhile, CP has also improved service, he said, noting that cross-country transcontinental intermodal service has been shaved to four days from five.

CP also said it will save C$18 million annually by relocating its corporate headquarters from downtown Calgary to a suburban rail yard. It will also review its real estate, with sales of surplus land potentially worth more than C$1 billion over the next four years, Chamoun said.

CP is also seeking a buyer or partner for a 660-mile section of its Dakota, Minnesota & Eastern Railroad, and is reviewing options for its Delaware & Hudson Railway in the U.S. Northeast.

$1=$0.99 Canadian Reporting By Susan Taylor; Editing by Peter Galloway

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