Canadian Pacific Railway Ltd. is out of the doghouse after six rough months as investors applaud its new severe-weather strategy and measures to boost efficiency.
CP shares climbed about 5 per cent to $60.81 on Thursday, one day after the railway vowed to bolster its contingency plans for weather-related disruptions, which repeatedly walloped its stock earlier this year.
The shares also got a lift from RBC Dominion Securities Inc. analyst Walter Spracklin's upgrade to "top pick" from "outperform," as well as favourable comments in other analysts' research reports.
"A key component of our positive thesis is the view that the weather-related effects are now behind the company and operations are reverting to normal," said Mr. Spracklin, who raised his 52-week target to $73 from $72.
CP shares, which traded at $69.48 in late January, slumped to a 52-week low of $57.09 by late June. The Calgary-based railway suffered a harsh winter as avalanches wreaked havoc on freight shipments in Western Canada. Heavy rain and flooding then hit the rail network in the spring, temporarily choking off service in parts of Saskatchewan, Manitoba and North Dakota.
As weather-related expenses rose, CP's first-half profit tumbled 40 per cent to $267.6-million. Revenue edged 1 per cent higher to $2.43-billion.
CP executives outlined a series of initiatives on Wednesday to restore the confidence of customers and investors, including sprucing up alternative routes in its network and deploying more locomotives and staff to overcome delays. It will also focus on extending sidings, which will give workers more flexibility in repositioning trains quickly.
Its decision to run longer, heavier trains and reduce the time that trains sit idle at rail yards also appears to be bearing fruit, said Desjardins Securities analyst Benoit Poirier, who reiterated his 52-week target price of $72.
CP's operating ratio, a key indicator of productivity that measures operating costs as a percentage of revenue, worsened in the first half. It rose to 86 per cent, compared with 80 per cent in the same period in 2010.
By contrast, Canadian National Railway Co. boasted an industry-leading operating ratio of 65 per cent in the first half, down just slightly from 65.1 per cent in the same period last year.
"CP is ready to roll on its quest for an operating ratio in the low-70s," Mr. Poirier said. He said investor confidence in CP's ability to become more efficient should improve as the railway's volumes increase. CP has recovered some market share in grain and coal deliveries after setbacks in the first half, and the company should also make gains in transporting consumer goods in containers.
Other analysts agree that CP has turned the corner. Cherilyn Radbourne of TD Securities Inc. reiterated her target of $74, saying that "investors have become too pessimistic with respect to the company's earnings power."
Tasneem Azim of UBS Securities Canada Inc. maintained her 52-week target price of $70.50. "Restoring service levels is a key priority going forward," with an array of customers on CP's North American network, Ms. Azim said in a research note.
Analysts forecast that CP will participate in the choppy economic recovery through its shipments of bulk commodities such as potash, coal and grain, and also benefit from energy and automotive shipments.
By the Numbers
Canadian Pacific stock's 52-week high, set Jan. 28: $69.48
Increase in first-half revenue: 1%
Decline in first-half profit: 40%
Annual dividend rate: $1.20
Brent Jang