Hunter Harrison.

4 January 2012

CP Rail Upgraded on Prospect of New CEO

New York New York USA - Canadian Pacific Railway Ltd. was upgraded to neutral from underweight at JP Morgan on raised expectations that Hunter Harrison will become CEO.
 
A letter from Bill Ackman of Pershing Square Capital Management clearly indicates that the activist shareholder is working with Mr. Harrison, who is an integral part of their strategy to drive improvement at CP.
 
Given Mr. Harrison's strong track record and reputation as the former head of Canadian National Railway Co., JP Morgan analyst Thomas Wadewitz believes the increased probability of him becoming CEO of CP is a source of upside potential for the stock.
 
"If Mr. Harrison is appointed CEO, it would provide a clear catalyst for operating improvement and margin expansion at CP," the analyst told clients.
 
Mr. Wadewitz said he believed there is an opportunity for CP to improve its operating ratio, an important gauge of the railway's efficiency measuring its operating expenses as a percentage of its sales, under the guidance of Mr. Harrison.
 
Year to date, CP's operating ratio sat at 82.4 percent. The lower the number, the better.
 
Mr. Wadewitz said Mr. Harrison could potentially reduce that to 70 percent in his base case, and 65 percent in his aggressive scenario, which would translate into earnings per share of US$7.24 in the base case and US$8.64 in the bull case by 2015, along with annual stock appreciation of 11 percent and 18 percent, respectively.
 
Pershing Square's track record indicates it is unlikely to back down. The New York-based hedge fund has driven management changes at J.C. Penney Co. and executed proxy fights at Sears Canada Inc., Ceridian Corp., and Target Corp.
 
"We believe that these examples illustrate Pershing Square's potential strategy and also show they are willing to take an aggressive approach if CP's board resists their initiatives," Mr. Wadewitz said.
 
He raised his price target on CP shares to US$74 from US$60.
 
Jonathan Ratner.
 
Editor's Note:  Canadian Pacific shares were down 1.08 percent to $69.84 on the Toronto stock exchange 5 Jan 2012.