23 February 2006
Next CPR CEO Inherits Challenges
Fred Green, who takes over as chief executive of Canadian Pacific Railway Ltd. in May, replacing
Robert Ritchie, will inherit the high expectations of investors and analysts who can't help but compare the historic railway to
industry-leader Canadian National Railway Co.
Analysts and investors were not rattled by yesterday's announcement, since Mr. Green was appointed president in November, 2005,
signalling his eventual ascension to the top job.
But there were high hopes on Bay Street that Mr. Green, who joined CP Rail in 1978, will do away with the company's reputation for
surprising investors with disappointing results.
Mr. Ritchie is CP Rail's first and only CEO since the company was spun off in 2001 by Canadian Pacific Ltd., which he joined in 1970 as
a research analyst and from which he moved to CPR in 1972. He was appointed president in 1990 and then CEO in 1995.
"Rob led the company through a period of significant opportunities and challenges," said Ted Newall, chairman of CP Rail, in
a statement. "During his tenure, the CPR was able to rebuild its track network, increase its capacity, renew its locomotive fleet,
revitalize its rolling stock, modernize its IT systems and evolve into one of the safest railways in North America.
"The move of the headquarters to Calgary and the recreation of the CPR as a stand-alone company with its own share
structure were also significant accomplishments."
Mr. Newell is also stepping down and will be replaced by John Cleghorn.
Mr. Green is facing some formidable challenges.
CP Rail is benefiting from intense investor interest in rail stocks, spurred by the commodities boom. CP Rail's shares have risen 24%
this year to $60.49, near a 52-week high. They now trade well above historical levels at 16 times earnings.
North American companies are purchasing more goods from Asia, generating more shipping business. Railroads are also benefiting as
commodities are shipped to the west coast for transport to Asia. CP Rail and other companies have improved their service by implementing
scheduled shipments.
Jim Hall, a portfolio manager at Mawer Investment Management Ltd. in Calgary, said railroads would suffer with a slowdown in economic
growth or a decline in global trade. They are also bumping up against limits to how much volume ports can handle, especially on the west
coast.
Since 1995, CP has spent about $8-billion on track upgrades, more efficient locomotives and lighter rail cars, Mr. Green
said in a recent speech.
Investors in CP Rail continue to focus on its operating efficiency, measured by proportion of revenue consumed by expenses. CP's
operating ratio improved by 2.6 percentage points in 2005 to 77.2%, compared with 63.8% at Canadian National. CP has set a goal of
trimming the ratio to 75%.
CP Rail has contended that comparisons to CN are not entirely justified, given they are different businesses with different assets. Ted
Larkin, an analyst at Orion Securities Inc., said that CP Rail's efficiency compares favourably to that of other North American rail
companies. "CN is the outlier," he said.
|
