CP Rail profit up 23% on better efficiency

Canadian Pacific Railway had $400 million of net income in the third quarter up 23 per cent from last year on higher revenue and improved efficiency but short of the profit growth that analysts had been anticipating.

The quarter's $2.31 earnings per share was below theestimate of $2.35 per share while revenue was short of the $1.69 billion of revenue generally expected by analysts, according to Thomson Reuters data.

CP shares fell shortly after the Toronto Stock Exchanged opened Tuesday but reversed and climbed $1.3 per cent to $224.58at mid-day.

CSX deal off the table

Canadian Pacific confirmed Monday that talks with U.S. peerCSXCorp., which had been in the news for about a week, ended without a deal, putting a damper on the Calgary-based company's hopes for an expanded North American rail network.

CPsaid that no further talks are planned withCSXof Jacksonville, Fla. It did not say specifically why the "exploratory conversations" ceased or when they ended, but noted that regulatory concerns generally appeared to be a "major deterrent" to major railways joining forces.

CSXdeclined to comment on Monday. A report in the Wall Street Journal more than a week ago saidCSXhad rebuffedCP'sovertures.

CP'snetwork stretches from Vancouver to Montreal and the populous U.S. Northeast. Canadian Pacific also has an extensive network in the U.S. Midwest, including at the major rail hub through Chicago.

CSX'ssystem also reaches Chicago and traverses much of the eastern United States from Florida to the U.S. border with Ontario.

CEO Hunter Harrison had hoped to build CP's rail network to help manage bottlenecks, particularly in Chicago.

Canadian Pacific isn't in talks with any other railroads, but Harrison didn't rule out the possibility.

"Are we focusing on something else because this didn't seem to work? No. But if somebody picks up the phone and calls us and says would you like to explore some opportunities, yes, I will listen to them. Certainly," Harrison said.

Despite missing expectations, Canadian Pacific showed substantial improvements over its results in the third quarter of 2013. Net income was up $76 million or 23 per cent from $324 million, net income per diluted share was up 47 cents or 26 per cent from $1.84 and revenue was up $136 million or 8.7 per cent from $1.53 billion a year earlier.

Analysts say margins could be higher

"TheCPteam delivered another quarter of impressive results," said Harrison,CP'schief executive officer. "Despite recent volatility in commodity prices, we are confident in the strength of the franchise and are on track to finish the year withCP'sstrongest quarter to date."

CanaccordGenuity analyst David Tyerman attributed the revenue miss to a smaller increase in prices than anticipated, although volumes were in line with his estimates. Tyerman also said in a research note that CP's profit margins were slightly below expectations, even though operating margin was better than expected

Desjardins analyst Benoit Poirier also said that CP's operating ratio was better than expected and suggested that the earnings miss was due to the impact of stock-based compensation, giving that the shares were up about$40 in the quarter.

"Recall that CP's sensitivity to stock-based compensation is $850,000 for every $1 increase in the share price," Poirier wrote in a note ahead of the company's quarterly conference call.