WHEELING AND DEALING
Calgary-based carrier is projected for a big return as it switches to its new CEO
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MONTREAL— During Hunter Harrison’s four-year reign at Canadian Pacific Railway Ltd., shareholders about doubled their money. Even after his exit, Wall Street sees more room to run.
The Calgary-based carrier offers the biggest potential return among major North American railroads as Harrison protege Keith Creel takes over as chief executive officer. Canadian Pacific is also the cheapest of the continent’s six largest rail stocks after Kansas City Southern, based on the ratio of stock prices to projected earnings.
To capture the upside, Creel will need to reverse a sales slump — a different kind of challenge from the ones Harrison tackled. The former CEO, who left to run CSX Corp., whipped Canadian Pacific into shape by cutting costs and speeding up ser- vice, turning a perennial laggard into a top performer.
“Volumes are the next step,” said Josh Duitz, who holds Canadian Pacific shares as part of the $1.4 billion he manages at Alpine Woods Capital Investors in Purchase, N.Y. “If you get good volume growth, earnings are really going to start increasing.”
Creel, 48, is targeting percentage growth in the high single digits for adjusted per-share earnings in 2017, which would top last year’s 2-percent gain. His forecast assumes an increase in volumes, in sharp contrast with last year’s 3.9-per-cent drop in carloads.
He’s off to a slow start. Canadian Pacific’s carloads were unchanged this year through the first nine weeks, trailing the 3-per-cent increase for major carriers, according to data compiled by the American Association of Railroads.
The new CEO, who took over Jan. 31, is counting on a rebound in bulk commodities, which accounted for about 45 per cent of sales last year. Grain, the biggest business line, and potash are poised to climb, said Da- vid Tyerman of Cormark Securities.
Boosting revenue with existing resources “is the key to driving additional operating margins,” Creel said in a presentation last month. “Train length matters, train weight matters, train miles matter. And speed matters. Speed is critical to the whole thing. The faster they turn, the fewer you need.”
Creel declined to provide additional comment on his plans, said Marty Cej, a spokesperson for the railroad.
Canadian Pacific has the top consensus recommendation among North American railroads and the highest percentage of “buy” recommendations from analysts. It’s poised to return almost10 per cent in the next year, best among peers, according to data compiled by Bloomberg. Canadian National Railway Co., the country’s biggest railroad, is expected to fall 1 per cent.
That would be a turnabout from the past12 months through Friday, when Canadian Pacific’s 19-per-cent gain trailed the 24-per-cent advance of its main rival. Both companies beat the 16-per-cent gain of Canada’s bench- mark S&P/TSX Composite Index.
Canadian Pacific’s price is17.4 times projected earnings in the next year, the lowest ratio among major North American carriers excluding Kansas City Southern. CSX, buoyed by speculation over Harrison’s arrival as CEO, is now the continent’s most expensive large railroad stock with a P/E ratio of almost 24.
One danger to Creel’s plans is the possibility of a U.S. tax on imports, promoted by U.S. President Donald Trump. But Creel said he expected that any effects from a border tax would be offset by a weakening Canadian dollar. That leaves boosting sales as the most pressing challenge. Harrison, 72, cut the operating ratio, a closely watched efficiency gauge in which lower is better, to less than 59 per cent last year from more than 83 when he took over in 2012.
“You can only go from a mid-80s operating ratio to mid-50s once,” said Michael O’Brien, lead manager of the $5-billion TD Canadian Equity Fund, which owns Canadian Pacific shares. “There will be a new, more mature phase for the company.”