How CN is outperforming s its more high-profile rival CP | Financial Post
Transportation
MONTREAL To get a real sense of the difference between Canadian Pacific Railway Ltd. and Canadian National Railway Co., you would be well served to look at the characteristics of their top shareholders.
At CP, activist investor Bill Ackman now the company s second-biggest holder after selling more than 10 million shares initiated a divisive proxy battle at the underperforming s railway in 2011, gaining control of its board and ousting CEO Fred Green in favour of outspoken railway veteran Hunter Harrison, who had just retired from CN.
By contrast, CN chief executive s Claude Mongeau has never even met his top shareholder, Bill Gates, who holds 10.6% of the railway s s shares through his holding company, Cascade Investment, and another 2.1% through the Bill & Melinda s Gates Foundation.
In a way, Mr. Ackman and Mr. Gates serve as proxies for the railways s they ve chosen s to invest in. Mr. Ackman and his choice for CEO, Mr. Harrison, are both frank, demanding leaders who attract attention wherever they go. Since Mr. Harrison took over the corner office at CP, the company has dramatically improved its performance, lowering its operating ratio to the mid-60s from the low-80s. (Operating ratio is a key measure of railroad efficiency that tracks operating costs as a percentage of revenue. A lower number is better.)
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But CN, run by the unassuming Mr. Mongeau, s is quietly outperforming CP on several fronts. CN s revenue for the first nine months of the year was nearly double that of CP, and CN s third-quarter operating s ratio was 58.8% versus 62.8% at CP. Mr. Mongeau was chief financial s officer under Mr. Harrison and succeeded him when he retired at the beginning of 2010.
Perhaps s this financial outperformance is why Mr. Mongeau is able to shrug off the recent push by Mr. Harrison for rail industry consolidation. In October, CP said it held exploratory conversations with competitor CSX Corp. about a possible merger, but they led nowhere.
Mr. s Harrison used those failed talks as an opportunity to advocate for industry consolidation. There have been no merger attempts between major North American railroads, known as Class 1s, since CN tried to acquire BNSF Railway Co. now owned by Warren Buffett in 1999. The U.S. Surface Transportation Board responded by putting a 15-month moratorium on Class 1 mergers and implementing new, stringent regulations.
I m not spending much time speculating about potential mergers, Mr. Mongeau said. It s a tall order to get a Class 1 transaction approved, and that view is shared by many. It makes it a bit of a daunting task, so you have to look at the alternatives instead.
But CN has an edge in Chicago. In 2007, under the leadership of Mr. Harrison before he crossed s to CP, CN bought the Elgin, Joliet and Eastern Railway, known as the EJ&E, from United States Steel Corp. The purchase gives CN a continuous route around Chicago and has improved train speed by 60% since 2009.
We ve spent more than half a billion dollars [in Chicago] between the acquisition of the EJ&E and all the investments we made to address community impacts and connect the railroads and build up capacity, he said.
Congestion has been worsening in key rail hubs like Chicago because s of an increased volume of nearly all the commodities shipped by railways, including crude oil, as pipeline s projects linger in regulatory limbo.
Rail shares took a beating Friday after the Organization of Petroleum Exporting Countries decided not to cut output despite a slump in oil prices, sending futures below the US$70-per-barrel mark for the first time since 2010. CN s shares fell nearly 4.5% on fears that the astronomical growth in crude-by-rail will slow down as a result.
Railroads are playing a complementary role to pipelines and I see that continuing for the long term whether or not Keystone gets approved s which, for the record, Mr. Mongeau believes will happen eventually.
Mr. Mongeau added that Western Canadian producers are better positioned to weather low oil prices than they were a few years ago thanks s to the growth in crude-by-rail. This has given them new ways to get their product to market and, in turn, lowered the spread between the prices they receive and the benchmark West Texas Intermediate price.
“It’s helped us gain market share gain market share against other modes, including pipelines, gain market share against all railroads, not just CP and that’s helping us grow at a low incremental s cost.”
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Transportation
MONTREAL To get a real sense of the difference between Canadian Pacific Railway Ltd. and Canadian National Railway Co., you would be well served to look at the characteristics of their top shareholders.
At CP, activist investor Bill Ackman now the company s second-biggest holder after selling more than 10 million shares initiated a divisive proxy battle at the underperforming s railway in 2011, gaining control of its board and ousting CEO Fred Green in favour of outspoken railway veteran Hunter Harrison, who had just retired from CN.
By contrast, CN chief executive s Claude Mongeau has never even met his top shareholder, Bill Gates, who holds 10.6% of the railway s s shares through his holding company, Cascade Investment, and another 2.1% through the Bill & Melinda s Gates Foundation.
In a way, Mr. Ackman and Mr. Gates serve as proxies for the railways s they ve chosen s to invest in. Mr. Ackman and his choice for CEO, Mr. Harrison, are both frank, demanding leaders who attract attention wherever they go. Since Mr. Harrison took over the corner office at CP, the company has dramatically improved its performance, lowering its operating ratio to the mid-60s from the low-80s. (Operating ratio is a key measure of railroad efficiency that tracks operating costs as a percentage of revenue. A lower number is better.)
Related Ottawa tightens railway safety measures in wake of Lac-Megantic train disaster Railway renaissance': Why the rail industry is attracting the biggest names in finance With grain-hauling rules set to expire, railways and farmers spar over extension
But CN, run by the unassuming Mr. Mongeau, s is quietly outperforming CP on several fronts. CN s revenue for the first nine months of the year was nearly double that of CP, and CN s third-quarter operating s ratio was 58.8% versus 62.8% at CP. Mr. Mongeau was chief financial s officer under Mr. Harrison and succeeded him when he retired at the beginning of 2010.
Perhaps s this financial outperformance is why Mr. Mongeau is able to shrug off the recent push by Mr. Harrison for rail industry consolidation. In October, CP said it held exploratory conversations with competitor CSX Corp. about a possible merger, but they led nowhere.
Mr. s Harrison used those failed talks as an opportunity to advocate for industry consolidation. There have been no merger attempts between major North American railroads, known as Class 1s, since CN tried to acquire BNSF Railway Co. now owned by Warren Buffett in 1999. The U.S. Surface Transportation Board responded by putting a 15-month moratorium on Class 1 mergers and implementing new, stringent regulations.
I m not spending much time speculating about potential mergers, Mr. Mongeau said. It s a tall order to get a Class 1 transaction approved, and that view is shared by many. It makes it a bit of a daunting task, so you have to look at the alternatives instead.
But CN has an edge in Chicago. In 2007, under the leadership of Mr. Harrison before he crossed s to CP, CN bought the Elgin, Joliet and Eastern Railway, known as the EJ&E, from United States Steel Corp. The purchase gives CN a continuous route around Chicago and has improved train speed by 60% since 2009.
We ve spent more than half a billion dollars [in Chicago] between the acquisition of the EJ&E and all the investments we made to address community impacts and connect the railroads and build up capacity, he said.
Congestion has been worsening in key rail hubs like Chicago because s of an increased volume of nearly all the commodities shipped by railways, including crude oil, as pipeline s projects linger in regulatory limbo.
Rail shares took a beating Friday after the Organization of Petroleum Exporting Countries decided not to cut output despite a slump in oil prices, sending futures below the US$70-per-barrel mark for the first time since 2010. CN s shares fell nearly 4.5% on fears that the astronomical growth in crude-by-rail will slow down as a result.
Railroads are playing a complementary role to pipelines and I see that continuing for the long term whether or not Keystone gets approved s which, for the record, Mr. Mongeau believes will happen eventually.
Mr. Mongeau added that Western Canadian producers are better positioned to weather low oil prices than they were a few years ago thanks s to the growth in crude-by-rail. This has given them new ways to get their product to market and, in turn, lowered the spread between the prices they receive and the benchmark West Texas Intermediate price.
“It’s helped us gain market share gain market share against other modes, including pipelines, gain market share against all railroads, not just CP and that’s helping us grow at a low incremental s cost.”
CMHC finally releases foreign ownership data on housing t
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