15 August 2005
Canadian Pacific Railway Enjoys Profitable "Sunshine" After Years of Cutbacks
After years of belt-tightening and layoffs, Canadian Pacific Railway is enjoying
unprecedented good times as a massive surge in traffic to Asia is fuelling expansions and boosting both revenue and stock price to
record levels.
Calgary-based CPR, the smallest of the six major railroads left in North America, says the current boom times contrast
sharply with the past decade. Since 1999, the company's workforce has been pared down by about 15 percent or 3,000 people to about
16,000 currently.
"We had to cut a lot of employees - and I don't make any excuses for that - but it's been a tough ten years," president
and chief executive Rob Ritchie said in an interview with The Canadian Press.
"It's been tough on the morale of employees - tough always cutting, and now we've finally got things swinging our way,"
said Ritchie.
"We've finally got into the sunshine and I want to enjoy it."
The numbers are impressive. Profits for the first half of 2005 are up 90 percent over last year to $205 million. The company is
sticking to forecasted revenue growth of between 12 and 14 percent this year.
And while CPR is in the final year of a three-year program to cut 820 more jobs, the truth is that the railroad is
growing its ranks again. It hired 600 new train crew employees in 2004 and will hire and train another 400 train crew staff this
year.
Insatiable demand from China and other Asian countries for raw materials like coal, sulphur and potash has been a boon to all the
North American railroads.
In the spring, CPR signed a five-year shipping deal with Elk Valley Coal, the world's second-largest
producer of metallurgical coal used in making steel.
Thanks to sky-rocketing coal prices, the deal was 20 percent more lucrative for the railroad than last year's
contract, with even better rates slated for 2006. And the railroad says that deal alone should add about 55-cents to
60-cents worth of per-share earnings growth this year.
Grain shipments, one of the CPR's biggest bulk businesses, could also increase substantially this year if early crop forecasts
remain strong.
Ritchie admits that the spiralling growth in business to and from China have created "certain chokes in the logistics
systems" on both sides of the Pacific, but his railroad is gambling that overall demand will continue to grow.
CPR is in the midst of a $160-million expansion on its key western corridor that is expected to add four new trains
per day in and out of the Port of Vancouver when work is completed by October or November.
Further expansions next year are certainly possible, with Ritchie saying he will "take a good strong look" at demand
over the winter.
Investors have supported Canadian Pacific (TSX:CP), boosting shares up by more than 40 percent since the start of the year. At the
end of July, shares hit an all-time high of $48.12 before dropping slightly and closing on Thursday at $45.80.
Canada's largest railroad, Montreal-based Canadian National (TSX:CNR) has also enjoyed a similar ramp-up
in share price this year, recently setting record highs of $82.89.
But railway analyst James Valentine with Morgan Stanley in Chicago said recently that Canadian Pacific shares remain the best deal.
"We've seen upside in all the railroad stocks over the next year," Valentine wrote in a recent report. But he said
Canadian Pacific "remains the cheapest railroad in our universe."
Valentine also says CPR is in the best position to overcome the relentless string of record-high fuel prices, with
less fuel-hedges coming off this year than its competitors.
With the improving fortunes of Canada's two large railroads and the remaining big four in the U.S., comes the possibility of
another round of consolidation in the industry.
But CPR boss Ritchie doesn't think the appetite is there.
"My read of it is that we've got a job to harvest the capital that we put into our network and make a return on that capital
- something that the industry has been woefully short of doing for years."
"Free cash is starting to become available in the industry and do you want to take it and buy another railway or do you want
to give it out to investors? So far the investors have said "pick me, pick me.".
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