ALBERTA

Strong Q3 results push Canadian Pacific and CN shares to all-time highs

10/23/2013 08:01 EDT | Updated 12/23/2013 05:12 EST
Canada's two largest railways are on a roll, with both delivering strong earnings results that handily beat analyst expectations and sent their shares soaring to all-time highs.

Canadian Pacific Railway posted record earnings and revenue and its best-ever operating ratio Wednesday, a day after Montreal-based rival Canadian National said its revenues reached a quarterly record and its industry-leading efficiency ratio continued to improve.

Stock of both railways set records in Wednesday trading on the Toronto Stock Exchange.

CPR closed up more than 10 per cent, or $13.79, to a best ever $148.53 after hitting $150.42 earlier in the session. CN was up $4.84, or 4.4 per cent, at $114.59, also the most ever, after hitting $116.20 at one point.

CPR president Hunter Harrison boasted Wednesday that the Calgary-based railway is firing on nearly all cylinders as its profits surged 45 per cent in the third quarter. But he tempered an earlier prediction that CP would become the most profitable railway in North America.

"Look, the competition had a hell of a quarter," he said during a conference call.

CN's earnings grew by 6.1 per cent to $705 million as its operating ratio improved 0.8 of a percentage point to 59.8 per cent. CPR earned $324 million while its operating ratio fell to 65.9 per cent from 74.1 per cent, a gauge in which lower is better.

"When I made those comments I didn't think they were going to be going to those kind of levels, so maybe I underestimated their ability," he told analysts.

The veteran executive, who has led both railways during his long career, said CP has narrowed the efficiency gap from 17 points when the turnaround plan was launched 16 months ago. He said further improvement is possible in the fourth quarter if Mother Nature co-operates and that he expects to reach an annual threshold of 65 per cent in 2014, more than a year ahead of schedule.

"I said early on in this game when I got here, there is plenty of business for both these railroads to do well. Take business off the highways and put it on the rail and both of us will be very successful."

Canadian Pacific (TSX:CP) has boosted its efficiency by cutting costs, mainly through the elimination of jobs. Its total workforce has decreased 18 per cent over the past year.

Meanwhile, continually improving service by making trains longer, heavier and faster, while dramatically reducing travel times promises to provide new opportunities, particularly for CP's domestic intermodal business, the company said.

"This focus on continuing to lower our costs is obviously closing the gap with our competitors, which is key to allowing the company to compete in markets we have not been able to historically," said Keith Creel, CP's president and chief operating officer.

Canadian Pacific Railway earned $1.84 per diluted share for the period ended Sept. 30, up from $1.30 per share in the third quarter of 2012.

Excluding a one-time $7 million tax item, adjusted profit was $331 million or $1.88 per share, compared with the $1.72 per share forecast by analysts.

The railway's revenue was $1.5 billion, up six per cent from $1.45 billion in the year-ago period, while yields also increased.

Revenues were below expectations, mainly due to weaker intermodal carloads which were down six per cent, with forest products down 12 per cent, automotive down 10 per cent and grain off four per cent.

Fertilizers were up eight per cent, industrials and consumer products six per cent and coal one per cent.

Harrison said CP has entered the fourth quarter with momentum and is well-positioned for a record year in 2013 and at least meet its guidance for revenues to grow by seven to eight per cent even without a boost from the economy.

"And I think that is probably going to turn to be a very conservative number because I happen to think that this issue of service is going to play a big part in our growth."

Crude oil shipments moderated over the quarter but CP expects to move 85,000 to 90,000 units this year and is on track to transport 140,000 to 210,000 annual carloads over the longer term.

David Tyerman of Canaccord Genuity said CP's cost-cutting initiatives are producing lower operating ratios faster than anticipated.

"We may still be going to the same place but we seem to be getting to that place more quickly and the sooner you get there the more valuable that is," he said in an interview.

The common threads for both railways is the focus on costs, although CN is also winning market share after several intermodal contract wins.

"The market wasn't anybody's friend yet they both did well anyway through operational excellence," the analyst said.

"The theme in the fourth quarter is they'll probably both do better because the market will help them with the big grain harvest."

CP announced that it has begun to search for a new chief financial officer following Brian Grassby's announced retirement by year-end.

Harrison said he expects to remain at the helm for at least another 2 1/2 years and then have a seat on CP's board of directors.

CPR also said it plans to sell $2 billion worth of assets, primarily buildings and land made surplus with yard closures. Some of the unidentified properties are located in Northern Ontario.

MORE:Albertacp