July 27, 2011 / 11:44 AM / in 7 years

UPDATE 4-Flood-hit CP Rail eyes second-half recovery

* CP says floods cost it C$16 mln in Q2

* Whole network operational for past two weeks

* CP’s stock retraces earlier gains as other stocks fall

* EPS C$0.75 vs C$0.98 yr earlier but better-than-expected (Recasts after conference call; updates share price move)

By Nicole Mordant

VANCOUVER, July 27 (Reuters) - Canadian Pacific Railway (CP.TO) is positioned for earnings growth in the second half of the year, its chief executive said on Wednesday, as the railroad works to woo back customers after bad weather snarled traffic on its tracks over the past six months.

Widespread spring flooding, which shut CP’s main U.S.-Canada line for nearly a month, cost the company C$16 million ($16.8 million) in the second quarter, CP, Canada’s second-biggest railroad, said.

The railroad’s entire network has been back in service since July 12, Chief Executive Fred Green said after the company reported a 23 percent drop in quarterly profit due to the flooding, which washed away tracks and cut train speeds and productivity.

“We’re positioned to deliver second-half earnings growth and productivity improvements,” Green told a conference call with analysts and reporters.

“This is about service. It would not be the appropriate time for us to be constraining resources... If you’re going to err over the coming couple of quarters, you’ll err on the side of an abundance of resources so that we have the ability to meet any upside opportunity ... to reestablish our credibility,” he said.

Flooding resulted in 90 outages on CP’s network in Canada and the United States during the second quarter. Its primary north-south corridor to Chicago was out of service for 23 days due to flooding on the Souris River in North Dakota.

Most analysts say CP was just unlucky that its tracks were in the line of poor weather, which included avalanches and heavy snow at the start of the year. They said they were positive about the productivity improvements that CP is implementing.

“In our opinion they are finally focused on (improving efficiency) and they know what they need to do,” said Edward Jones analyst Brian Yarbrough.

“Historically CP is one of the least efficient railroads. There is a huge opportunity for it to close that gap. (Today’s results) don’t change our longer-term thesis,” he said.


CP’s shares, which were up as much as 1.5 percent early on Wednesday, gave up the gains as the day progressed and losses on the overall Toronto Stock Exchange deepened. By early afternoon CP’s stock was down 0.1 percent at C$58.30. The main market index was 1.5 percent weaker.

CP executives said demand for its services was strong from shippers of bulk commodities, including grains, potash and coal. Bulk commodities make up half of CP’s operations.

The outlook for consumer goods, which fall under CP’s intermodal unit, was less certain partly due to flagging consumer confidence in North America, CP marketing head Jane O’Hagan said.

CP said on Wednesday that its profit in the April-June quarter fell to C$128 million, or 75 Canadian cents a share, from C$166.6 million, or 98 Canadian cents a share, a year earlier.

That was ahead of the average analyst forecast of 73 Canadian cents a share, according to Thomson Reuters I/B/E/S. Analysts had lowered their forecasts during the quarter as flooding continued to shut down rail service.

CP’s revenue rose 2 percent to about C$1.26 billion, in line with analysts’ forecasts of C$1.27 billion.

The company said its operating ratio — an important measure of a railroad’s productivity — rose to 81.8 percent in the quarter, from about 78 percent in the year-before quarter.

The lower the ratio, which measures operating costs as a percentage of revenue, the more efficient the railway.

By comparison, Canadian National Railway Co (CNR.TO), CP’s larger and more efficient rival, said this week its operating ratio was 61.3 percent in the second quarter.

CP’s earnings came two days after CN announced better-than-expected quarterly earnings even though floods in Western Canada, forest fires and mudslides affected its operations. [ID:nN1E76K2GN]

$1=$0.95 Canadian Additional reporting by Gowri Jayakumar in Bangalore; Editing by Joyjeet Das and Peter Galloway

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