* Adjusted EPS C$0.94 vs C$1.07 year earlier
* Analysts forecast profit of C$0.88
* Modest carload growth seen in first half of 2010
* Stock ends 3 pct lower (Adds closing stock prices, forecast details)
By Susan Taylor
OTTAWA, Jan 28 (Reuters) - Canadian Pacific Railway Ltd (CP.TO) (CP.N) reported a better than expected fourth-quarter profit on Thursday as it cut operating expenses, and said it would keep a tight rein on costs as markets remain uncertain.
The results from Canada’s second-biggest railway, also buoyed by lower taxes, come amid a “dismal rail earnings season relative to expectations,” according to UBS sector analysts.
“The economic signals on the general economy remain weak and volatile,” said CP Rail Chief Executive Fred Green on a conference call with analysts.
“Looking at 2010, you can expect more of the same from CP: emphasis on cost management, productivity and the realization of longer-term structural savings.”
CP said it built more financial and operational flexibility into its business in 2009, so that it will be well positioned when recovery comes.
The company said it expects some improvement in 2010 over 2009 conditions, when volumes sank in some months by as much as 25 percent to 30 percent. But CP does not believe business will return to levels seen in 2007 and 2008.
“We are modeling modest growth in carloads in the first half of the year,” Green said. “The last half remains dependent on economic recovery and the results in some key export segments. And we will only gain clarity on this as the year progresses.”
In 2010, grain volume is expected to match or lag 2009 levels. Fertilizer and coal volumes will grow, but CP said it could not predict the timing, volume or sustainability. Merchandise will be mixed, while intermodal volumes are seen higher in the first half.
The year ahead also includes “considerable headwinds” in pension expenses and foreign currency impacts, Green said.
CP said fourth-quarter net profit rose to C$194.1 million ($183 million), or C$1.15 a share, from C$188.1 million, or C$1.21 a share, a year earlier, when there were fewer shares outstanding.
Excluding items, earnings fell to 94 Canadian cents a share from C$1.07.
That beat the average analyst expectation for a profit of a 88 Canadian cents a share, according to Thomson Reuters I/B/E/S.
“Earnings beat was driven by a strong performance in operations that improved overall operating ratio despite ... an appreciating Canadian dollar, a higher price of oil and fuel surcharge lag,” Macquarie Capital analyst Avi Dalfen said in a note.
CP’s revenue from operations that span Canada and the northern United States fell 16 percent to C$1.1 billion from C$1.3 billion. Volumes were down 7 percent over last year.
Operating expenses were 17 percent lower at C$853 million, while the operating ratio, a key measure comparing working expenses to earnings, improved 120 basis points to 76 percent.
Calgary, Alberta-based CP said it plans to spend C$680 million to C$730 million on capital programs in 2010, including C$585 million for track renewal.
Pension contributions in 2010 are estimated between C$150 million and C$200 million, said the railway, which made a voluntary C$500 million pension payment in 2009 to reduce volatility in future funding requirements.
CP shares fell 3 percent to end Thursday’s session at C$52.76 on the Toronto Stock Exchange and at $49.47 in New York.
$1=$1.07 Canadian Reporting by Susan Taylor, with additional reporting by Scott Anderson in Toronto; Editing by Lisa Von Ahn, Dave Zimmerman and Rob Wilson