October 27, 2009 / 12:44 PM / 8 years ago

UPDATE 4-CP Rail profits down but looks beyond cost cuts

* CEO says company in better shape after cost cuts

* Still cautious about an economic recovery

* CP, other rail stocks down on weaker U.S. consumer data

* Q3 EPS C$0.85 vs analyst estimate of C$0.78 (Recasts with executive comment; updates stock prices)

By Nicole Mordant

VANCOUVER, British Columbia, Oct 27 (Reuters) - Canadian Pacific Railway Ltd (CP.TO) is leaner and meaner than before the recession and can now ease a little off a cost-cutting drive to step up sales, its chief executive said on Tuesday.

Executives at Canada’s second biggest railroad, which reported a 29 percent drop in earnings because of lower volumes of goods shipped, remain cautious on chance of a recovery.

“We are ready for volume recovering but we are not counting on it,” CP Rail CEO Fred Green said on a conference call.

“We are becoming increasingly comfortable that our ability to sustain our performance is solid,” he said describing a range of cost and efficiency improvements at the railroad that included running longer and heavier trains.

Green said his focus now was “not as much on pure cost control” at the company, which operates in both Canada and the United States, but also on “stimulating the marketplace.”

Despite better-than-expected third quarter earnings, CP shares slumped along with other North American railroads because of bleak U.S. consumer confidence data.

CP shares finished down nearly 5 percent at C$46.32 on the Toronto Stock Exchange concerns over continued weakness in the U.S. job market [ID:nN22541121]. Its larger domestic rival Canadian National Railway Co (CNR.TO) shed nearly 3 percent and U.S. peer Union Pacific Corp (UNP.N) dropped over 5 percent.

Railways, because of the wide variety of products they ship, are considered leading indicators of the economy and usually gain or lose first from signs of a recovery or dip.

“I wouldn’t attribute the weakness to CP specifically, but to broader macro concerns. (CP‘s) results were better than expected,” said Raymond James analyst Steve Hansen.

EARNINGS DOWN BUT BETTER THAN EXPECTED

CP, which operates in both Canada and the northern United States, said on Tuesday its income, adjusted for certain nonrecurring items, fell to C$144 million, or 85 Canadian cents a share, for the third quarter, ended Sept. 30 as traffic volumes sagged along with the weak economy.

The results were ahead of analyst forecasts of 78 Canadian cents a share, according to Thomson Reuters I/B/E/S, as Canada’s No.2 railway cut costs and operated more efficiently.

Quarterly revenue fell 20 percent to C$1.1 billion compared with analyst expectations of C$1.07 billion.

CP’s operating expenses decreased 20 percent to C$827 million in the quarter while its operating ratio, a key measure that compares working expenses to earnings, was largely unchanged at 76 percent.

Despite the weak performance of CP and other railroad stocks on Tuesday, RBC Capital Markets analyst Walter Spracklin was optimistic about the sector’s outlook.

“Overall, I very much like the railroad industry over the next year to two years. Even if we are not in a recovery phase, and we just trend along at current levels, we should see some growth over what was a very depressed volume period last year,” Spracklin told Reuters.

“If we are in a recovery period and we do see some increase in demand, then that growth, year over year, could be closer to double digits,” he said.

$1=$1.07 Canadian Additional reporting by Euan Rocha; editing by Janet Guttsman

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