TORONTO (Reuters) - Shares of Canadian Pacific Railway (CP.TO) touched an all-time high on Wednesday as the railroad detailed a turnaround plan that includes sweeping job cuts which could save about C$500 million ($503 million) over the next four years.
The stock’s rally extends a gain of nearly 30 percent 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 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 on Wednesday told analysts at a New York event to outline the company’s turnaround plan.
Analysts said the overhaul appears a credible strategy to revive the fortunes of CP, whose operating efficiency is currently 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 peaked at C$98.04 on the Toronto Stock Exchange, a new high point since the company’s 2001 listing, before edging back to C$97.23. That was a gain of C$4.23 or 4.5 percent.
A turnaround has largely been priced into CP stock, said Doerksen, who has an “underperform” rating and a C$84 target on the shares.
The most dramatic change at CP will come as the company eliminates 4,500 of its 19,500 jobs by 2016, including up to 1,000 contractors and many management positions. The company said it will cut 1,700 jobs by year-end.
“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,” Harrison said.
The downsizing represents 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 several 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 new target, CP expects compound annual revenue growth of 4 to 7 percent and annual capital spending to C$1 billion to C$1.1 billion.
But the company admitted there were challenges ahead.
Pension expenses are poised to jump from C$41 million to C$140-C$150 million in 2013, said Chief Financial Officer Brian Grassby, due to accounting changes and low interest rates.
Pension expenses will also be affected by contract talks with the Teamster’s union, which represents some 5,000 CP workers and is seeking more details on job cuts.
The talks are under arbitration, and CP said it will present its proposal this weekend, arguing for a pension cap, similar to what it secured in its last three union contracts.
Under the process, which has a January 25, 2013 deadline, the arbitrator may pick either the company or union’s proposal, a blend of the two, or something completely different.
Broader economic conditions could also impact CP’s growth projections, said Chief Marketing Officer Jane O‘Hagan.
Still, the company sees expansion in several markets including its energy business. CP sees an annualized 70,000 car loads of crude oil in the first quarter of 2013 and expects that to double or triple over the next three years, O‘Hagan said.
“To summarize our successes, we will surpass our previous target of C$400 million in new revenue from all energy-related products by next year,” she said.
A string of executives trumpeted CP’s ‘war on bureaucracy’, which aims to make operations faster and more efficient.
Since July, for example, the company has eliminated the need for 195 locomotives and 3,200 leased rail cars, said Scott MacDonald, senior vice-president of operations. CP has also improved service, with its cross-country transcontinental intermodal service shaved to four days from five.
CP will save C$15 million a year by relocating its corporate headquarters from downtown Calgary to a suburban rail yard. It will review its real estate, perhaps selling surplus land.
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.
Reporting By Susan Taylor; Editing by Peter Galloway, Janet Guttsman and Bob Burgdorfer