Pershing Square's positions in 4Q 2013

Part 4

Why Pershing Square trims its stake in the Canadian Pacific Railway

Pershing Square reduced its position in Canadian Pacific Railway (CP) from 23,125,192 shares in 3Q 2013 to 17,159,888 shares last quarter. This is still the largest position at 31.55 % in Pershing Square’s U.S. long portfolio that was initiated in 3Q 2011. Canadian Pacific Railway, through its subsidiaries, operates as a transcontinental railway providing freight transportation services, logistics solutions, and supply chain expertise in Canada and the U.S.

CPEnlarge GraphIn May 2012, Ackman won a proxy battle with the board at Canadian Pacific, replacing CEO Fred Green with Hunter Harrison, who has been overseeing the turnaround efforts at the railroad operator. Pershing had said back in the 1Q 2012 on CP that “the railroad’s operating margins are half that of its Canadian competitor due to its inefficient asset utilization and productivity.” Pershing stated last year that Canadian Pacific’s share price has more than tripled since the hedge fund’s investment in the company.

In June, Pershing announced that it would sell up to ~30% of its existing position in Canadian Pacific, for portfolio management reasons. Despite the sales, the firm said it expects “to remain CP’s largest shareholder and for CP to remain one of our largest investments over the coming years as the turnaround story continues to play out.”

CPHEnlarge GraphShares rose last month post the company’s 4Q 2013 results announcement. Net income increased to C$82 million ($74 million), or C$0.47 per diluted share from C$15 million ($13 million), or C$0.08 per share in the year-ago quarter. Revenue increased 7% to C$1.61 billion ($1.44 billion) despite being impacted by extreme winter weather in December. Full year total revenues were up 8% to C$6.1 billion ($5.51 billion). For 2013, the company said it achieved an adjusted operating ratio of 69.9%, a 710 bps improvement and an all-time record. For 2014, CP expects a revenue growth of 6% to 7% over 2013 revenue and an operating ratio of 65% or lower.

CP shipped more grain, coal, fertilizer, and industrial goods in 2013, but its intermodal business saw revenue decline 3% after the Orient Overseas Container Line business was lost to rival Canadian National Railway Company (CN). Intermodal consists of domestic and international (import-export) container traffic. CP and CN have also recently come under fire from the western Canadian grain industry over the poor service transporting its record crop to ports for export.

CP saw a $435 million charge on the sale of the western portion of its Dakota, Minnesota, and Eastern (DM&E) line, which encompasses operations in parts of Minnesota, South Dakota, Wyoming, and Nebraska, to Genesee & Wyoming Inc. (GWR) for about $210 million. The deal, announced in January, includes 660 miles of track, about a quarter of the DM&E line that CP acquired in 2008. Ackman had called the $1.48 billion acquisition a “blunder” back in 2012.

CP moved 25,000 carloads of crude in 4Q for a total of 90,000 carloads for the year. Revenue ton miles (RTMs) were up 20% due to gains in crude oil and increases of frac sand originating from mines that continue to ramp up their volume. It expects to transport 140,000–210,000 carloads of crude oil a year by the end of 2015, thereby capitalizing on the oil-by-rail boom.

News reports stated that CP and CN have been pushing for rail safety by adding a surcharge on transportation of crude in containers older than the CPC 1232 model. The move is aimed at averting oil-train accidents. The CPC 1232 model refers to those manufactured since tougher safety standards were voluntarily adopted in October 2011 and has enhanced safety features, including reinforced outer shells and protective shields.

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