Share values remain strong | CPR earnings fall in second quarter but investors stay the course
(Reuters) — Canadian Pacific Railway’s investors have shrugged off weaker quarterly results and bid up its shares, signalling confidence in the colourful new chief executive’s ability to deliver on a promised turnaround.
CP’s second-quarter net income fell to $103 million, or 60 cents a share, from $128 million, or 75 cents, a year earlier.
By contrast, shares of CP Rail’s bigger rival, Canadian National Railway ebbed even though it reported a stronger-than-expected 17 percent jump in earnings to $631 million, or $1.44 a share, partly because of the extra freight it had shipped during a strike at CP Rail. Canada’s biggest railway also raised its profit forecast.
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For CP Rail, it was the first opportunity for Hunter Harrison to speak in public since the former CN Rail boss was appointed to head the Calgary-based railroad in June after a bruising proxy battle.
He was the handpicked choice of activist investor William Ackman, whose Pershing Square Capital Management defeated CP’s former management and installed Harrison.
CP’s stock “went up as the call went along,” said Canaccord Genuity analyst David Tyerman, referring to a conference call with the CEO. “That is definitely a reflection of how people feel about Harrison.”
Harrison said that he had great confidence in CP’s future, not least because there was “a lot of talent” in the company.
“I feel even stronger than I did prior to arrival in Calgary that we can accomplish the type of numbers we talked about during that proxy contest,” he said.
Harrison said he expected no big shifts in CP’s operational strategy but “there might be a little more emphasis placed here or there” — comments that would comfort investors who might be nervous of a quick, radical overhaul, Tyerman said.
On July 25, Harrison singled out two areas for improvement. He wants train speeds to increase and he wants to upgrade CP’s terminals, which he described as “1950s and ‘60s vintage hump yards.” That said, capital spending was likely to decrease as the railway better uses infrastructure, he said.
Harrison said he had met with five or six of CP’s biggest customers, some of whom had come out against his appointment during the proxy battle.
“The tone for whatever reason is certainly different today than it was a month ago,” he said, describing the meetings as “a big love-in.”
He said in an interview that he planned to hold an investor day in November to reveal detailed plans for CP.
Earlier, CP Rail said its 20 percent drop in second-quarter profit was largely caused by a shutdown of its Canadian operations by a nine-day strike by 4,800 locomotive engineers, conductors and traffic controllers, and because of the costs related to Harrison’s hiring.
Meanwhile, Montreal-based CN Rail reported stronger-than-expected second-quarter earnings and raised its full-year earnings forecast.
CN revised its full-year forecast for earnings per share growth of 15 percent, up from 10 percent, but it was no more than what the market expected.
Canadian National “met a bar that has been raised. Expectations ran up quite a bit going into the quarter,” BMO Capital Markets analyst Fadi Chamoun said.
“At CP, you’ve got a reverse situation where there was a lot of uncertainty about the quarter and their performance. The results underscore that operationally, the company seems to have a pretty strong momentum when you exclude a lot of these one-time issues that they highlighted,” he said.
CP said the strike, which ended when the Canadian government legislated employees back to work, is estimated to have wiped 25 to 30 cents from its diluted earnings per share.
It also booked $38 million of management charges in the quarter. That included $16 million of deferred retirement compensation for Harrison and $20 million for Pershing Square to reimburse it for amounts it paid Harrison to make up for losses he incurred in a lawsuit that CN launched against him.
CP also recorded a one-time payment of $4 million as a payout to Green, who quit in May.
CN Rail’s improved earnings came on the back of higher volumes in most of the products it ships as it picked up business during the CP strike.
CN CEO Claude Mongeau said the business win was largely temporary as customers returned to CP after the strike ended.
“But it was a great opportunity for us to showcase our service, and we see it as a lead-in to a deeper relationship in the future,” he said on a conference call, specifically mentioning Canpotex, Canada’s large potash export consortium.
CN is keen to win more business from Canpotex, which primarily uses CP Rail to move its big volumes of potash.
CN’s revenue rose 13 percent to $2.54 billion in the quarter. CP’s rose eight percent to $1.33 billion.
