(The following article by Brent Jang was posted on the Globe and Mail website on February 1.)
TORONTO — Canadian Pacific Railway Ltd., encouraged by last year’s 32-per-cent surge to a record profit, plans to let the good times roll in 2006 as it prepares to transport more cargo during an Asian trade bonanza.
Freight revenue last year rose in six of CPR’s seven business categories, with the exception being sulphur and fertilizer. But that segment is expected to rebound this year, and the outlook is also bright for grain and industrial and consumer goods.
CPR also confirmed yesterday that it’s cutting 400 office jobs, or 15 per cent of white-collar positions at its Calgary headquarters and North American branches. The reductions in management and administrative jobs represent 2.5 per cent of the railway’s total work force. They are being targeted largely through attrition, and led to a fourth-quarter charge of $44-million.
About 170 office employees left CPR in December and January, and most of the remaining 230 departures will be completed by the end of the first quarter. CPR spokesman Len Cocolicchio, who moved in 1996 to Calgary as the railway transferred its head office from Montreal, completed his last day at the company yesterday and is among those who accepted a “bridging” package for early retirement.
Despite the special fourth-quarter charge, CPR exceeded analysts’ expectations by posting a $543-million profit last year, or $3.39 a share, up from $413-million or $2.60 in 2004. Spurred by higher freight rates, revenue climbed to $4.4-billion from $3.9-billion.
With a mild winter so far, CPR’s operations have run smoothly, chief executive officer Robert Ritchie said in an interview yesterday. “January was a good month for railroading, but the winter is a long way from being over.”
Rival Canadian National Railway Co. has a better operating ratio, a key measure of productivity, and while CPR wants to narrow the gap, he played down any pursuit of a “magic number” to catch up with CN. CPR posted an operating ratio of 74.1 per cent last year, compared with CN’s 63.8 per cent. A lower operating ratio is better.
Fred Green, CPR’s president and chief operating officer, said during a conference call yesterday that the railway is embarking on a decentralization strategy. Mr. Green said that by granting more decision making to branches such as those in Minneapolis and Toronto, “we can be nimble and quick.” In a recent internal memo titled “Organizational change for greater success,” he wrote CPR must “narrow the operating ratio gap with our direct competitor” — referring to CN.
CPR shares slipped 29 cents to $54.71 yesterday on the Toronto Stock Exchange, but they have jumped 16 per cent in the past three weeks amid excitement in the investment community about a “rail renaissance” across North America. Booming Asian trade has strengthened the bottom line of key carriers.
Fadi Chamoun, an analyst at UBS Securities Canada Inc., has a 52-week price target of $58 for CPR. The odds of further sharp gains, in light of the recent rally, are diminishing for the rail sector, he said.
The question mark is whether coal and potash customers, which recently reduced their forecast for shipments, will be able to quickly boost output and increase their orders for CPR’s railcars.
“Nothing is forever, but it’s a good time to be in the railroad business,” Mr. Ritchie said. “It’s like pushing a rock uphill. You have to keep improving, and that’s the challenge for the whole management team. It would be nice to have some more coal and potash.”
Although Mr. Ritchie said the railway is poised for “another great year,” CPR didn’t budge from its previous profit guidance of $3.60 to $3.85 a share for 2006, based on oil averaging $58 (U.S.) a barrel.
In the fourth quarter, CPR posted a $135.4-million (Canadian) profit or 85 cents a share, compared with $129.3-million or 81 cents in the same period in 2004. Hedging contracts and fuel surcharges partly offset higher diesel prices, and the latest profit was the best recorded for any fourth quarter in CPR’s history. Quarterly revenue rose to $1.17-billion from $1.02-billion.