Canadian Pacific Railway Ltd.’s efficiency drive under Hunter Harrison is going faster than expected as the company basks in posting a record third-quarter profit.
Investors have been looking for clues into how much time the chief executive might take to stage a turnaround at Calgary-based CP, and on Wednesday, the magnitude of a closely watched statistic’s improvement surprised the market.
The third-quarter operating ratio – a key indicator of efficiency that measures costs as a percentage of revenue – dropped to 65.9 per cent, compared with 74.1 per cent in the year-earlier period. A lower number is the better, and CP has narrowed the efficiency gap between it and rival Canadian National Railway Co.
CP shares surged on the announcement of stellar third-quarter earnings and improved operations, rising $13.79 to record-high close of $148.53, or a 10.2-per-cent gain. CN stock also rallied, climbing 4.4 per cent to $114.59.
Montreal-based CN, which announced a $705-million third-quarter profit after markets closed on Tuesday, posted a 59.8-per-cent operating ratio in the quarter. “They see us in the rear-view mirror,” Mr. Harrison said of CN.
CP booked a third-quarter profit of $324-million or $1.84 per share, up from $224-million or $1.30 in the year-earlier period. Profit on an adjusted basis was $1.88 a share, exceeding analysts’ earnings estimates of $1.72. Total quarterly revenue rose to $1.53-billion from $1.45-billion.
By the end of 2013, Mr. Harrison will have 30 months left in his four-year mandate. Catalyst investor Bill Ackman of Pershing Square Capital Management LP enlisted the former CN CEO to shake up Canadian Pacific. Mr. Harrison replaced Fred Green as CP’s top executive in late June, 2012, six weeks after Pershing Square won a bitter proxy fight against CP.
CP registered an operating ratio of 71.1 per cent in the first nine months of 2013, compared with 78.8 per cent in the same period of 2012.
Mr. Harrison had thought it might take until 2015 to reduce CP’s annual operating ratio to 65 per cent, which would be a huge improvement from 81.3 per cent in 2011. He formerly sought to reduce CP’s operating ratio to the range of 70 to 72 per cent for 2014, but now reckons 65 per cent is within reach for next year.
“This team did a hell of a job this quarter,” Mr. Harrison said during a conference call with analysts. “This thing is really coming together and hitting on, if not all cylinders, it’s awful close.” There is room to reduce the operating ratio further – “the low sixties or shame on us,” he said.
Citigroup analyst Christian Wetherbee said CP’s performance clears the path for greater earnings power and supports a strong stock price over the next several quarters.
Former CN executive Keith Creel, who became CP’s president and chief operating officer in February this year, is being groomed to succeed Mr. Harrison. Asked if he is prepared to retire earlier than anticipated given the sparkling results, Mr. Harrison replied: “We’re on a pretty nice roll here. I don’t want to walk out too soon.”
While praising CP, Mr. Harrison said CN is a well-run railway in its own right. “There is plenty of business for both these railroads to do well,” he said.
CP has lost four significant contracts to CN, but Mr. Harrison said his company has momentum.
CP garnered $384-million in third-quarter revenue from industrial and consumer products, up 17 per cent; $129-million from fertilizers and sulphur, up 16 per cent; and $177-million from coal, up 10 per cent. The company is optimistic that it will be able to increase rail shipments of heavy crude in future.
The railway also said that chief financial officer Brian Grassby will retire at the end of this year.