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Canada's two big railways left investors cheered on Wednesday despite a big divide in their quarterly results, with Canadian National Railway (CNR-T) reporting a 17-percent gain in profit and Canadian Pacific Railway (CP-T) posting a 20-percent drop.
The market shrugged off CP Rail's earnings and pushed up, focusing on what analysts said were stronger underlying operations under a new, promising chief executive.
CP said its second-quarter profit drop was largely caused by a shutdown of its Canadian operations by a nine-day strike by 4,800 locomotive engineers, conductors and traffic controllers and because of the costs related to the hiring of the company's new CEO, Hunter Harrison.
Harrison, the former CEO of CN Rail, CP's bigger competitor, was appointed to head the Calgary, Alberta-based railroad in June after a bruising proxy battle between CP and its biggest shareholder, hedge fund Pershing Square Capital Management.
Pershing won the fight, which ended with CP's previous CEO quitting and Harrison, Pershing's candidate for CEO, being installed.
Montreal-based CN Rail reported stronger-than-expected second-quarter earnings, partly because of the extra freight it shipped during the CP strike. It also raised its full-year earnings forecast.
Even so, CN shares fell as its revised full-year forecast for earnings per share growth of 15 percent, up from 10 percent, was only what the market had expected anyway.
"(CN) met a bar that has been raised. Expectations ran up quite a bit going into the quarter," BMO Capital Markets analyst Fadi Chamoun said.
"At CP you've got a reverse situation where there was a lot of uncertainty about the quarter and their performance. The results underscore that operationally the company seems to have a pretty strong momentum when you exclude a lot of these one-time issues that they highlighted," he said.
STRIKE, MANAGEMENT COSTS WEIGH
CP said second-quarter net income fell to $103 million, or 60 cents a share, from C$128 million, or 75 cents, a year earlier.
CP said the strike, which ended when Ottawa legislated employees back to work, is estimated to have wiped 25-30 cents from its diluted earnings per share.
CP also booked $38 million of management charges in the quarter. That included $16 million of deferred retirement compensation for Harrison and $20 million for Pershing Square to reimburse it for amounts it paid Harrison to make up for losses he incurred in a lawsuit that CN launched against him.
CN said in January it was halting pension and other payments worth nearly $40 million to Harrison, arguing that he was breaching non-compete and confidentiality obligations by involving himself with CP. CN has asked a court to rule if its action was lawful.
CN, Canada's biggest railroad, reported a 17-percent jump in net income to $631 million, or $1.44 a share, on the back of higher volumes in most of the products it ships as it picked up business during the CP strike.
CN CEO Claude Mongeau said the business win was largely temporary as customers returned to CP after the strike ended.
"But it was a great opportunity for us to showcase our service, and we see it as a lead-in to a deeper relationship in the future," he said on a conference call, specifically mentioning Canpotex, Canada's large potash export consortium.
CN is keen to win more business from Canpotex, which primarily uses CP Rail to move its big volumes of potash.
BIG DIFFERENCES IN EFFICIENCY
CP said its operating ratio, an important barometer of performance in the railway industry, weakened to 82.5 percent in the second quarter from 81.7 percent in the year-earlier period.
The lower the number -- which measures operating costs as a percentage of revenue -- the more efficient the operation. By this measure, CP is the weakest performer of North America's big railroads.
Pershing Square made this lack of efficiency central in its proxy battle with the railroad, blaming CP's previous CEO Fred Green for the weakness. Pershing pointed to Harrison's track record of improving efficiency while at CN. CP shareholders and analysts mostly agreed with this assessment.
By comparison, CN's operating ratio, the strongest of North America's Class 1 railroads, was 61.3 percent in the quarter. That, however, was flat with the same quarter a year earlier.
CN's revenue rose 13 percent to $2.54 billion in the quarter. CP's rose 8 percent to $1.33 billion.