(The Globe and Mail posted the following article by Brent Jang on its website on January 17.)
TORONTO — Recent weakness in Canadian Pacific Railway Ltd.’s share price could make the stock an attractive investment in the short term, but rival Canadian National Railway Co. is still favoured by many for the long term.
Analysts point to Montreal-based CN’s operating ratio as the key indicator of the company’s efficiency. That’s where operating expenses are divided by operating revenue — simply put, a lower number shows which railway is better able to corral expenses and bolster revenue. CN came in at 63.3 per cent in the third quarter, compared with CPR’s 77.4 per cent.
To help narrow the productivity gap, CPR plans to pare almost 400 office jobs, or 15 per cent of non-unionized staff located at its Calgary headquarters and branches in other cities, according to industry and labour officials. While CPR declined to comment on the office job reductions, it confirmed “temporary layoffs” affecting 140 unionized positions, such as train crews.
The railway’s job cuts are being welcomed by analysts, some of whom view CPR as a “show-me” stock, meaning the company must demonstrate that it’s able to consistently deliver on its goals.
John Chu, an analyst at Research Capital Corp., said some investors have been growing impatient waiting for CPR to show that it’s serious about improving its operating ratio.
CN’s stock performance has outpaced CPR’s in the past three years, with CN shares more than doubling while CPR stock climbed 55 per cent.
But CPR received a lump of coal in the form of a surprise announcement last month from one of its largest customers, Calgary-based Fording Canadian Coal Trust, the majority owner of Elk Valley Coal Partnership. Fording forecasts that production at Elk Valley’s B.C. mines will be lower than expected because of a shortage of tires for trucks used to haul coal.
CPR’s shares have fallen 8 per cent since Fording’s Dec. 7 announcement, but are still up 19 per cent since last January. They rose 33 cents to $47.60 yesterday on the Toronto Stock Exchange.
CN shares fell 10 cents to $90.49 on the TSX yesterday — down 5 per cent since hitting a record intraday high of $95.71 on Dec. 6, but up 30 per cent in the past year.
Mr. Chu said CPR suffered a steeper drop than its rival over the past six weeks, but that could present a buying opportunity for investors looking for short-term gains.
His 52-week price targets are $55 for CPR and $102 for CN. “Longer term, we still feel that CN is a better buy than CPR. CN has the better financial track record,” he said.
CPR’s strategy has been to tweak and expand its network while CN, Canada’s largest railway, has focused on making key acquisitions and integrating new operations into its own system.
Avi Dalfen, an analyst at Blackmont Capital Inc., said he expects CPR to report profit of $3.22 a share when it releases its 2005 financial results on Jan. 31. That would be at the high end of the railway’s management guidance of $3.15 to $3.25 a share.
Last month, CPR reduced its 2006 profit forecast by 10 cents a share, in part because of lower-than-expected projections for transporting coal in its railcars. It cut its forecast to a range of $3.60 to $3.85, from $3.70 to $3.85.
But Mr. Dalfen said CPR’s strengths include its rail system at the bustling Port of Vancouver, which handles Asian imports of consumer goods and Canadian exports of commodities. He has 52-week target prices of $57.50 for CPR and $98 for CN, placing “buy” recommendations on both railways.
Fred Green, CPR’s president and chief operating officer, is being groomed to take over as chief executive officer when Robert Ritchie retires, analysts say. Mr. Green is spearheading the current job cuts, signalling that he’ll take aggressive action where necessary to rejuvenate CPR’s fortunes, they say.
Train set
Some analysts may be touting Canadian Pacific Railway as an attractive short-term play, but Canadian National Railway still looks to have the upper-hand among those focused on the longer term.