January 26, 2012 / 3:53 PM / 6 years ago

Canadian Pacific operating efficiency weakens

(Reuters) - Canadian Pacific Railway (CP.TO) said on Thursday an important measure of operating efficiency weakened even as quarterly profit jumped, a trend that will likely fuel demands by CP’s largest shareholder for a new CEO at the country No.2 railroad.

CP’s shares dipped after CP said its operating ratio worsened to 78.5 percent in the quarter, from 77 percent in the year-ago period. The higher the ratio, which measures operating costs as a percentage of revenue, the less efficient the railway.

For the full year, CP’s operating ratio was 81.3 percent, compared with 77.6 percent in 2010. Canada’s largest railway, Canadian National Railway (CNR.TO), reported a 2011 operating ratio of 63.5 percent.

On this measure, CP is one of the less efficient of the major North American railways, a main reason why William Ackman’s Pershing Square Capital Ltd wants CP to name Hunter Harrison, a former CNR CEO, as its new chief executive.

“Pershing Square believes that CP can produce an operating ratio of 65 percent by 2015, which we have previously suggested is probably an overly optimistic goal,” said National Bank analyst Cameron Doerksen in a note to clients after the results.

CP reiterated its plans to drive down its operating ratio within three years, and refined the target to 70-72 percent from what was previously pegged as the “low 70s”.

CP is backing the current CEO, Fred Green, setting the stage for a proxy battle with Pershing, which holds 14.2 percent of the shares.

Ackman was not immediately available to comment on the results.

Shares of the railway company were down 0.67 percent at C$71.18 by mid-morning on Thursday on the Toronto Stock Exchange.


Net income rose to C$221 million ($218.37 million), or C$1.30 a share, in the three months to end-December, from C$186 million, or C$1.09, in the same period in 2010. The latest result reflected an income tax benefit of 22 Canadian cents a share.

Analysts on average expected earnings of C$1.09, according to Thomson Reuters data.

Revenue rose 8.8 percent to C$1.4 billion, in line with expectations.

“If I had to characterize the quarter, I would suggest that it was probably relatively in line with our expectations,” said Raymond James analyst Steve Hansen. “Revenue was strong, but expenses were a bit higher than expected.”

Analysts noted that CP’s fourth quarter was boosted by record fuel efficiency and train weights.

Offsetting the operational gains were compensation and benefits expenses, up 7.5 percent in the quarter, and higher fuel costs, which rose 32 percent.

($1 = 1.0121 Canadian dollars)

Additional reporting By Nicole Mordant; Editing by Frank McGurty

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