July 25, 2012 / 5:44 PM / 5 years ago

CP Rail's new CEO ignites stock as rival CN simmers

(Reuters) - Canadian Pacific Railway’s (CP.TO) investors on Wednesday shrugged off weaker quarterly results and bid up its shares in a sign of confidence in its colorful new chief executive’s ability to deliver on a promised turnaround.

By contrast, shares of CP Rail’s bigger rival, Canadian National Railway (CNR.TO), ebbed even though it reported a stronger-than-expected 17 percent jump in earnings, partly because of the extra freight it had shipped during a strike at CP Rail. Canada’s biggest railway also raised its profit forecast.

For CP Rail, it was the first opportunity for Hunter Harrison to speak in public since the former CN Rail boss was appointed to head the Calgary, Alberta-based railroad in June after a bruising proxy battle.

He was the handpicked choice of activist investor William Ackman, whose Pershing Square Capital Management defeated CP’s former management and installed Harrison.

CP’s stock, which closed 5.2 percent higher in Toronto, “went up as the call went along,” said Canaccord Genuity analyst David Tyerman, referring to a conference call with the CEO. “That is definitely a reflection of how people feel about Harrison.”

Ackman, whose hedge fund is CP Rail’s largest shareholder, had persuaded other shareholders that Harrison, a 40-year veteran of the railroad industry, could turn around CP, the weakest performer of North America’s big railroads.

Harrison said that he had great confidence in CP’s future, not least because there was a “a lot of talent” in the Calgary, Alberta-based company.

“I feel even stronger than I did prior to arrival in Calgary that we can accomplish the type of numbers we talked about during that proxy contest,” he said.

Harrison said he expected no big shifts in CP’s operational strategy but “there might be a little more emphasis placed here or there” -- comments that would comfort investors who might be nervous of a quick, radical overhaul, Tyerman said.

CP’s second-quarter results highlighted the criticism leveled at the company under former CEO Fred Green. Its operating ratio, an important barometer of performance in the railway industry, weakened to 82.5 percent in the second quarter from 81.7 percent a year earlier.

The lower the number -- which measures operating costs as a percentage of revenue -- the more efficient the operation. Pershing Square made this lack of efficiency central in its proxy battle with the railroad. Pershing pointed to Harrison’s track record of improving efficiency while at CN.

On Wednesday, Harrison singled out two areas for improvement. He wants train speeds to increase and he wants to upgrade CP’s terminals, which he described as “1950s and ‘60s vintage hump yards.” That said, capital spending was likely to decrease as the railway better utilizes infrastructure, he said.

Harrison said he had met with five or six of CP’s biggest customers, some of whom had come out against his appointment during the proxy battle.

“The tone for whatever reason is certainly different today than it was a month ago,” he said, describing the meetings as “a big love-in”.

He said in an interview that he planned to hold an investor day in November to reveal detailed plans for CP.

“REVERSE SITUATION”

Earlier, CP Rail said its 20 percent drop in second-quarter profit was largely caused by a shutdown of its Canadian operations by a nine-day strike by 4,800 locomotive engineers, conductors and traffic controllers, and because of the costs related to Harrison’s hiring.

Meanwhile, Montreal-based CN Rail reported stronger-than-expected second-quarter earnings and raised its full-year earnings forecast.

Even so, CN shares fell half a percent as its revised full-year forecast for earnings per share growth of 15 percent, up from 10 percent, was no more than what the market had already expected.

Canadian National “met a bar that has been raised. Expectations ran up quite a bit going into the quarter,” BMO Capital Markets analyst Fadi Chamoun said.

“At CP, you’ve got a reverse situation where there was a lot of uncertainty about the quarter and their performance. The results underscore that operationally the company seems to have a pretty strong momentum when you exclude a lot of these one-time issues that they highlighted,” he said.

STRIKE, MANAGEMENT COSTS WEIGH

CP’s second-quarter net income fell to C$103 million ($101.03 million), or 60 Canadian cents a share, from C$128 million, or 75 Canadian cents, a year earlier.

CP said the strike, which ended when the Canadian government legislated employees back to work, is estimated to have wiped 25 to 30 Canadian cents from its diluted earnings per share.

It also booked C$38 million of management charges in the quarter. That included C$16 million of deferred retirement compensation for Harrison and C$20 million for Pershing Square to reimburse it for amounts it paid Harrison to make up for losses he incurred in a lawsuit that CN launched against him.

CP also recorded a one-time payment of C$4 million as a payout to Green, who quit in May.

STRIKE BOON

CN Rail reported a 17 percent jump in net income to C$631 million, or C$1.44 a share, on the back of higher volumes in most of the products it ships as it picked up business during the CP strike.

CN CEO Claude Mongeau said the business win was largely temporary as customers returned to CP after the strike ended.

“But it was a great opportunity for us to showcase our service, and we see it as a lead-in to a deeper relationship in the future,” he said on a conference call, specifically mentioning Canpotex, Canada’s large potash export consortium.

CN is keen to win more business from Canpotex, which primarily uses CP Rail to move its big volumes of potash.

CN’s operating ratio, the strongest of North America’s Class 1 railroads, was 61.3 percent in the quarter. That, however, was flat with the same quarter a year earlier.

CN’s revenue rose 13 percent to C$2.54 billion in the quarter. CP’s rose 8 percent to C$1.33 billion.

On the Toronto Stock Exchange, CP’s shares rose C$3.91 to C$78.97. CN’s stock dropped 0.55 percent to C$86.83.

($1=$1.02 Canadian)

Additional reporting By Euan Rocha in Toronto and Bhaswati Mukhopadhyay in Bangalore; Editing by Peter Galloway and Frank McGurty

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