It is getting awfully hard to see Canadian Pacific Railway Ltd. as the underdog it once was.
Since Bill Ackman, the hedge fund manager who heads Pershing Square Capital Management, bought a 12 per cent stake in the company in 2011 with the aim of shaking up management, the share price has doubled. It is now by far the best-performing railway stock in North America.
The shift is amazing to anyone who has watched CP languish in recent years. Among the half-dozen publicly traded North American railways, CP used to be the clear laggard. For the five years between September 2006 and September 2011 – before its fortunes began to improve – the share price fell 9 per cent overall (not including dividends). That compares to an average gain of more than 65 per cent among its peers.
CP simply wasn’t able to excite anyone with its performance. For fiscal 2011, it reported earnings of $3.13 a share, down more than 20 per cent since 2006. Over the same period, rival Canadian National Railway Co. grew its earnings by about 47 per cent, on a per-share basis.
At the same time, CP’s operating ratio – an industry measure of efficiency, comparing operating expenses to net sales – trailed at 81.3 in 2011. CN’s operating ratio that year was 63.5. (A smaller number is better.)
No wonder Mr. Ackman saw an opportunity here. Railways aren’t burdened by any technological threats (you’ve got your rails; you’ve got your locomotives) that can put them out of business. According to Mr. Ackman’s strategy, proper management is the key to success – and his hope is that Hunter Harrison, who led CN between 2003 and 2009 – will do wonders as the recently installed chief executive of CP.
Mr. Harrison appears to have a similar focus on management. On Monday, he poached his new chief operating officer from CN. Beyond that, he has stressed the need to reduce the number of employees at CP, improve transit times for customers, close some intermodal terminals and increase train lengths and speeds.
“I have always maintained that by focusing on the best possible service, along with appropriate cost containment, the operating ratio will take care of itself,” Mr. Harrison said at an investor conference in December.
The thing is, his success already appears to be built in. CP now has a price-to-earnings ratio close to 29, well above CN’s P/E of 17. CP’s dividend yield of just 1.2 per cent also trails CN’s yield and is near the bottom of its peers.
And in terms of share price performance, CP has eliminated the gap. Over the past five years, to the end of January, CP has risen 88 per cent – beating CN by about 17 percentage points over the same period.
This is no longer a languishing railway that should be tempting investors with the promise of a dramatic turnaround. The market believes the turnaround is already here.