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Must-know: Chilton Investment Company's 1Q14 positions

Part 2
Must-know: Chilton Investment Company's 1Q14 positions (Part 2 of 7)

Why Chilton opens new position in Canadian Pacific Railway

Chilton and Canadian Pacific Railway

Chilton Investment added new positions in Canadian Pacific Railway (CP), CBS Corp. (CBS), and Wyndham Worldwide Corp. (WYN). It sold positions in CF Industries Holdings (CF), Norfolk Southern Corp. (NSC), and Tenet Healthcare (THC).

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Canadian Pacific Railway (CP) is a brand new position that accounts for 1.18% of Chilton’s 1Q14 portfolio.

CP, through its subsidiaries, operates as a transcontinental railway providing freight transportation services, logistics solutions, and supply chain expertise in Canada and the U.S. The company provides rail and intermodal transportation services over a network of approximately 14,400 miles, serving the principal business centers of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the northeast and midwest regions in the U.S.

The company’s revenues are primarily derived from transporting freight. Other revenue is generated primarily from
leasing of certain assets, switching fees, contracts with passenger service operators, and logistical management
services.

CP, which is Canada’s second-biggest railroad, transports bulk commodities, merchandise freight, and intermodal traffic. Bulk commodities include grain, coal, fertilizers, and sulphur. The bulk business represented approximately 42% of total freight revenues in 2013. Merchandise freight consists of finished vehicles and automotive parts, as well as forest, industrial, and consumer products. It represented approximately 36% of total freight revenues in 2013. Intermodal traffic consists largely of high-value, time-sensitive retail goods in overseas containers that can be transported by train, ship, and truck, and in domestic containers and trailers that can be moved by train and truck.

In May, 2012, activist investor William Ackman of Pershing Square Capital won a proxy battle with the board at Canadian Pacific, replacing chief executive officer (or CEO) Fred Green with Hunter Harrison, who has been successfully overseeing the turnaround efforts at the company. In May, CP said Harrison agreed to a contract extension with the railway for an additional year.

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Cost cuts support earnings increase

Shares surged despite CP missing on revenue estimates for 1Q14. Total revenues were up 1% to C$1.509 billion ($1.389 billion). Reported net income in the first quarter increased 16% to C$254 million ($233.9 million), or C$1.44 per diluted share, from C$217 million, or C$1.24 per share, in 1Q13. News reports noted that a decline in benefits and compensation expenses were able to offset weather-related spending.

Despite the “extraordinary cold and severe winter weather conditions,” operating income and operating ratio saw improvements. Operating income was up 17% to C$423 million in 1Q14. The operating ratio was 72% in 1Q14, compared with 75.8% in 1Q13, mainly due to efficiency savings generated from improved operating performance, asset utilization and insourcing of certain IT activities, and higher freight rates. A lower percentage of operating ratio normally indicates higher efficiency in the operation of the railway.

Harsh winter weather impacts grain and fertilizer shipments 

Freight revenues were $1,474 million in 1Q14, an increase of $15 million, or 1% from $1,459 million in 1Q13. Revenue ton miles (or RTMs) in 1Q14 decreased by 1,788 million, or 5% due to lower U.S. originating grain shipments and fertilizer shipments as a result of harsh winter operating conditions. However, CP saw higher volumes in Canadian originating grain, frac sand, and domestic containers in Intermodal. Revenue for the Intermodal segment declined 2% due to the exit of certain customer contracts and selected terminal closures.

Both CP and rival Canadian National Railway Company (CNR) came under fire from the Western Canadian grain industry over the poor service transporting its record crop to ports for export. Reports noted that both companies saw a legislation in March that expects it to transport a minimum amount of grain or face a penalty of up to $100,000 a day. Canada’s prairie provinces saw a record harvest leading to a grain backlog that experienced transportation challenges due to the severe weather. CP said it was disappointed with the legislation, adding that it expects to move 240,000 carloads of Canadian grain this crop year—a more than 20% increase over last year’s record.

CP initiates buyback and declares dividend

For 2014, CP expects a revenue growth of 6%–7% over 2013 revenue and an operating ratio of 65% or lower. It added that despite a slow start to 2014, it expects to meet its financial goals.

In March, CP said it will repurchase up to 5.3 million shares, or about 3% of its total outstanding shares, over the next year. It also declared a quarterly dividend of C$0.35 ($0.32) per share.

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