William Ackman - Date/Photographer unknown.

14 June 2012

Bill Ackman's Activist Positions in Canadian Pacific Railway (abridged)

New York New York USA - Bill Ackman's goals for Canadian Pacific Railway are big, and not enough progress has been made yet to clearly see whether his plans will work and his fighting for change offers a worthwhile competitive advantage. This week, the founder of Pershing Square Capital Management and activist investor issued a letter outlining the state of his current deals, including J.C. Penney and Canadian Pacific Railway, which are now almost 40 percent of his highly concentrated portfolio.
 
Control of Canadian Pacific Railway, the second-largest railway in Canada, is now in Ackman's hands. As he says in his letter, the vast majority of shareholders welcomed he and his six board nominees in May, while the chairman and CEO received the fewest votes and resigned.
 
Ackman's task is to turn around a company whose revenues and earnings have grown little in recent years. Revenue was US$4.4 billion in 2005 and US$4.8 billion in 2010. Earnings over that period went from US$448 million to US$563 million. Free cash flow fell to a loss in 2010 and 2011. The company lags the industry in several measures. For instance, it has a net margin of 12.6 percent, lower than the industry's 16 percent, ROE TTM is 13.9 percent compared to 17.2 percent, and debt to equity is 1.0 compared to 0.8.
 
Ackman believes almost all of the railroad's issues are related to operations. The operating ratio, the company's operating expenses as a percentage of revenue, is a key measurement for a railway's efficiency. Canadian Pacific had been working toward the goal of lowering its operating ratio to between 70 and 72 percent by 2014. Canadian National, its closest competitor, has already decreased its operating ratio to 63.5 percent in 2011. Of all large railroads, only Canadian Pacific failed to improve its operating ratio materially since 2003, according to Morningstar.
 
The more efficient Canadian National trades for US$80.81 a share on Thursday, compared to US$70.97 for Canadian Pacific. If Ackman's new board can similarly streamline the company, investors stand to realize substantial upside. It may prove difficult to do, as workers at CP have gone on strike recently after cost-cutting measures included reducing post-retirement benefits by 40 percent.
 
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.
 
Author unknown.