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Canadian Pacific posts big profitability gains; sees more improvement ahead

Canadian Pacific Railway locomotives are shuffled around a marshalling yard in Calgary, on May 16, 2012. THE CANADIAN PRESS/Jeff McIntosh

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Canadian Pacific Railway locomotives are shuffled around a marshalling yard in Calgary, on May 16, 2012. THE CANADIAN PRESS/Jeff McIntosh

CALGARY - Canadian Pacific Railway Ltd. delivered big profitability improvements in 2013, the first full year under the leadership of railway veteran Hunter Harrison.

Last year, the Calgary-based company's adjusted operating ratio — a measure of how much revenue is used to run the railway — was 69.9 per cent, an all-time record. During the last three months of the year, the operating ratio was at 65.9 per cent and, for 2014, the company aims to drive its operating ratio down to 65 per cent or lower.

By contrast, Canadian Pacific finished off 2012 with a full-year operating ratio of 77 per cent. The lower the operating ratio — a metric watched closely in the industry — the better a railway is considered to be performing.

"I think we exceeded most expectations," said Harrison, who took the helm of the company in mid-2012 following a bruising proxy fight between CP's directors and investors, who successfully pushed for the removal of CEO Fred Green.

"I think we've assembled now a team of railroaders that is second to none in the world."

The quarterly operating ratio was better than some analysts were predicting.

"CP's operating ratio of 65.9 per cent beat our estimate of 68.2 per cent," Canaccord Genuity's David Tyerman wrote in a research note.

"We think CP remains on track to achieve very strong (earnings per share) growth driven by cost cutting, but we think much or all of the company's improvement potential is already in our forecast," wrote Tyerman, who rates the stock a "hold."

RBC Dominion analyst Walter Spracklin said cost control was better than expected, leading to an operating ratio that beat his estimate of 68 per cent.

Desjardins Securities' Benoit Poirier had predicted an operating ratio of 68.5.

"On balance, we view CP's 4Q13 results as solid, taking into consideration the strong 2014 guidance, as well as the tough weather conditions that weighed on the industry," Poirier wrote in a research note

CP shares rose nearly seven per cent to $169.12 in early afternoon trading on the Toronto Stock Exchange.

For 2014, Canadian Pacific is predicting revenue growth of six to seven per cent and earnings per share of $6.42, which would be a 30 per cent improvement over last year.

Poirier said he considers that guidance "conservative" based on recent performance.

On a conference call with analysts to discuss the results, Harrison said there are a number factors that could help the company's operating ratio in 2014, like an improving pension solvency picture, and some that could hinder it, like nasty winter weather.

"Do I expect to do better than 65? Yes. What's the probability of it? We could debate that," said Harrison.

Is a 63 per cent operating ratio within grasp? "I wouldn't argue with that a whole lot."

"We've still got some issues out there. I don't know how this winter's going to be. I know if this winter continues like it is — and I hope it's not — we're going to have some catch-up to do in the next three quarters."

Also Wednesday, Canada's second-biggest railway (TSX:CP), which is also one of the country's oldest companies, posted $82 million in fourth-quarter net income, or 47 cents per share.

That's an increase from $15 million, or eight cents per share, in the fourth quarter of 2012, which included a number of unusual items related to the CP shakeup.

For the full year, CP's net income soared to $875 million, or $4.96 per diluted share from $484 million, or $2.79 per share, in 2012.

Stripping out the effects of one-time items, such as a $435 million charge related to the recent sale of part of its DM&E railway, Canadian Pacific's quarterly adjusted earnings rose 49 per cent to $338 million, or $1.91 per share, falling a bit shy of the $1.93 per share expected by analysts surveyed by Thomson Reuters.

For the full year, Canadian Pacific's adjusted net income rose 48 per cent to $1.1 billion.

Its revenue grew by seven per cent to $1.6 billion for the quarter and eight per cent to $6.1 billion for the full year.

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