Skip to main content

Shareholder activist Bill Ackman is sharpening his criticism of Canadian Pacific Railway Ltd., saying the company delivered a disappointing first-quarter performance while rivals forged ahead.

In a letter to CP shareholders, Mr. Ackman took aim at the railway's chief executive officer Fred Green and the board of directors, asserting that the freight carrier has posted underwhelming results since Mr. Green became CEO in May, 2006.

"The incontrovertible fact remains: Under the stewardship of this board and Mr. Green, CP's performance has deteriorated," he wrote in the letter Monday.

Mr. Ackman's hedge fund, New York-based Pershing Square Capital Management LP, is proposing that Canadian National Railway Co.'s former chief, Hunter Harrison, replace Mr. Green as CEO.

Calgary-based CP is defending its showing, urging shareholders to stick with the current chief. "CP is building on its significant momentum and continuing to achieve record operating metrics, which are resulting in improved financial results and creating enhanced shareholder value," the railway said.

CP also announced an increase to its quarterly dividend to 35 cents a share from 30 cents, for shareholders of record on June 22 this year.

"CP's board is unanimous in its belief that Pershing Square's demand that it replace the company's CEO with Hunter Harrison would delay and damage CP's value-generating plan," the railway said.

Raymond James Ltd. analyst Steve Hansen said CP is becoming more efficient, but "given the momentum that Pershing's proxy initiative has gathered in recent months, we suspect these improvements may come too little, too late."

While CP posted a first-quarter profit of $142-million, Mr. Ackman said the quarterly "non-financial operating" gains were "distorted by the material benefit of a record mild winter and the outsized capital and operating expenditures of the company's wasteful 2012 winter plan."

Mr. Ackman said that under Mr. Green's tenure, CP's first-quarter operating ratio – a key industry standard – has worsened to 80.1 per cent from 79.6 per cent while comparable major railways have seen their ratio improve on average to 71.4 per cent. A lower number is preferable, as the operating ratio gauges costs as a percentage of revenue.

"As they have in prior years, the current board and Mr. Green again ask shareholders to believe that sustainable progress is just around the corner. Unfortunately, the first quarter's results serve only to remind us of why we shouldn't. After six years of promises and 'detailed plans,' the company's performance is worse than it was in the comparable quarter in 2006, just prior to Mr. Green becoming CEO," the letter said.

Since Pershing Square became CP's largest shareholder last fall by acquiring what is now a 14.2-per-cent stake in the railway, CP's stock has soared by more than 60 per cent.

Pershing Square is proposing an alternative slate of seven directors as the proxy fight heads for a showdown at CP's annual meeting on May 17.

Some analysts say CP is entering a recovery phase, though they caution the railway faces a tall order to win over disenchanted shareholders who have watched rivals thrive.

On Monday, CN reported that its first-quarter operating ratio fell to an industry-leading 66.2 per cent, compared with 69 per cent in the same period last year. Its quarterly profit climbed 16 per cent to $775-million, while share profit of $1.75 surpassed analysts' expectations.

While CN benefited from mild winter temperatures, "these results are about strong execution," CN CEO Claude Mongeau said during a conference call with analysts. "Solid, solid first-quarter results."

Montreal-based CN is forecasting free cash flow of $950-million this year, up from its previous guidance of $875-million, while revising its outlook slightly upward for growth in adjusted diluted earnings per share to 10 per cent.

Canada's largest railway said its revenue rose to $2.35-billion for the three months ended March 31, up from $2.08-billion in the same period last year, bolstered by a North American economy on the mend.

CN saw revenue increases in key categories, including metals and minerals, coal and "intermodal" freight – goods transported inside standardized metal containers that are readily transferred among ships, trains and trucks.