29 October 2008
Efficiency Strategy Boosts CP Rail Stock
Canadian Pacific Railway Ltd.'s efficiency drive is gathering
momentum, providing an extra boost to its stock price yesterday.
The new campaign titled Execution Excellence for Efficiency, or E3, features initiatives such as running longer trains and
renegotiating fuel contracts with freight customers.
"Our efforts on efficiency are starting to pay off," CPR chief executive officer Fred Green said during a conference call
yesterday.
CPR shares jumped 15.7 percent to close at $50.35 on the Toronto Stock Exchange, while rival Canadian National Railway Co. gained 10.5
percent to finish at $52.
Mr. Green praised Brock Winter, senior vice-president of operations, and Jane O'Hagan, vice-president of
strategy and external affairs, for spearheading efforts that allowed the Calgary-based railway to operate trains faster
even as revenue climbed 7 percent to $1.26-billion in the third quarter.
"All in, a good quarter under tough market conditions," Mr. Green said, after CPR announced a $173-million
profit for the three months ended 30 Sep 2008 - a 21 percent decline from a year earlier but good enough to exceed
industry analysts' expectations.
CPR wrote down $28-million in asset-backed commercial paper (ABCP) in the third quarter. Combined with
$43-million in past writedowns, the company has now taken a $71-million hit, or 49 percent of its original
ABCP investment of $144-million.
But analysts are looking to the future, saying CPR is headed in the right direction.
"CPR generally did better than we had expected on most cost items," UBS Securities Canada Inc. analyst Fadi Chamoun said in
a research note, predicting that the company's stock price could rally further. Mr. Chamoun reiterated his "buy" rating,
with a 52-week price target of $77.
In the latest quarter, the railway had a 76 percent operating ratio - a key indicator of productivity that measures operating costs as
a percentage of revenue. A lower operating ratio is better, and CPR surpassed National Bank Financial Inc. analyst David Newman's
forecast of 77 percent. Mr. Newman reiterated his 52-week price target of $66.
Walter Spracklin, an analyst at RBC Dominion Securities Inc., said in an interview that investors best be cautious at this juncture.
"You have to factor in the weaker economy," said Mr. Spracklin, who shaved his 52-week price target to $63 from
$66 for CPR. The revised RBC price target would still be a 25 percent gain for investors over yesterday's close of $50.35.
CPR will release its 2009 outlook to institutional investors in Toronto on 13 Nov 2008. "I see CPR's stock price
range-bound until 13 Nov 2008," Mr. Spracklin said, calling yesterday's rise a "relief
rally."
CN posted an industry-leading operating ratio of 62.6 percent in the latest quarter. Analysts point out that CPR's
locomotives encounter steeper terrain and have higher operating costs than CN does in many parts of Western Canada.
But a recent trial run for a longer potash train at CPR went smoothly. In the trial, two locomotives were placed at the front, one in
the middle and one at the tail end - contrasting with the traditional format of two locomotives at the front and two in the middle.
Mr. Winter gave rave reviews to the longer train, part of the company's quest for productivity gains. "This is the kind of
innovative thinking we need to really stretch our assets. It's a real E3 win," he said in an employee newsletter.
Other cost-saving projects include renegotiating contracts with freight customers to recover diesel expenses.
This year alone, the railway is forecast to buy 1.1 billion litres of diesel, but older contracts had formulas that failed to recoup
enough money when fuel prices skyrocketed.
By the end of 2009, most contracts with freight customers will take into account the "refining margin" for producing diesel,
allowing CPR to "approach full recovery" for its fuel bills, Mr. Green said.
While Mr. Spracklin welcomed the cost controls, he tempered his growth outlook for Canada's second-largest railway. He
trimmed his estimate for share profit for 2009 to $4.50 from $4.71.
Mr. Spracklin also noted that CPR executives expect the sluggish global economy to offset the benefits of declining diesel bills and
the weakening loonie.
One potential long-term growth prospect will be CPR's US$1.5-billion acquisition of Dakota Minnesota &
Eastern Railroad Corp.
CPR won regulatory approval last month for the deal, and the Canadian firm is slated to take control tomorrow. Kevin Schieffer
resigned as DM&E's CEO earlier this month.
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