CPR profit more than doubles, girds for slowdown
Published: January 30, 2008
Source: Reuters - By Jonathan Spicer
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TORONTO (Reuters) - Canadian Pacific Railway (CP.TO: Quote) said on Tuesday lower future income tax rates helped it more than double its fourth-quarter profit, but that the outlook for North American growth remained uncertain.

Shares of Canada's No. 2 railway climbed 3.4 percent to C$67.13 in afternoon trading as investors lauded the results, even though quarterly revenue was flat due to harsh weather and the appreciation of the Canadian dollar.

CP Rail earned a profit of C$342 million, or C$2.21 per share, in the last quarter of 2007. That's up from C$146 million, or 92 Canadian cents a share, a year earlier.

Excluding foreign exchange gains, losses on long-term debt and other items, diluted earnings per share rose four percent to C$1.20.

The railway, which has operations in Canada and the United States, said poor weather and high fuel costs restricted its ability to move freight volumes as planned.

"We're in an industry that has a lot of promise, and even in these economic-uncertainty times, pricing discipline continues," Chief Executive Fred Green said during a conference call with analysts and media.

The company reiterated its earnings forecast for 2008 of C$4.70 to C$4.85 per share before items, up from C$4.32 in fiscal 2007, suggesting strong demand for its bulk portfolio should drive earnings this year.

Although CP Rail, which ships forest products and other construction material, is vulnerable to a slowing U.S. economy, Green said high-growth Asian economies will help bolster demand.

"As a consequence, while (the U.S. economy) is important, it's not a critical matter in our economic outlook," Green said, adding the company expects a "soft landing" rather than a recession in the United States.

TAX CHANGE BOOST

Changes to Canada's income tax rates gave Canadian Pacific a C$145.8 million boost in the quarter ended December 31, lifting the company's earnings above expectations.

Avi Dalfen, analyst at Blackmont Capital, said the earnings were boosted primarily by better fuel refining costs, lower compensation expenses and a contribution from Dakota Minnesota and Eastern Railroad (DM&E), which CP Rail acquired last year for about US$1.5 billion.

Blackmont maintained its C$67 stock target, and a "hold" recommendation.

Quarterly revenue was C$1.19 billion, roughly unchanged from a year earlier. The company's operating ratio was 74.3 percent, compared with 73.1 percent a year earlier.

Fadi Chamoun, analyst at UBS, said the expectation-beating result was "not a high-quality beat but a good end to the year nonetheless."

Looking ahead, the company expects total revenue to grow by four to six percent in 2008, and "essentially flat" capital investment in the range of C$885 million to C$895 million.

However, "economic uncertainty also demands that we prepare ourselves for a possible downturn," said CP Rail's Green.

The outlook includes projected earnings from DM&E.

DM&E shares are currently in a voting trust, and the company said during the conference call that it expects a regulatory decision on the takeover by the end of September.

($1=$1.00 Canadian)

(Reporting by Jonathan Spicer; Editing by Bernadette Baum)