On April 20th, CP (CP, Financial) reported that first quarter revenue had declined 5%, as a result of the tepid macro-economic environment. On the earnings call, CP President Keith Creel highlighted that volumes will likely be down 6% for Q2, but that trends should improve in the second half of the year as comps get easier. Management expressed its view that Q2 will be the bottom for volumes and that the Canadian economy appears to be stabilizing.
Despite muted growth, CP’s operational transformation continues, as the company announced that it had achieved a record Operating Ratio (“OR”) of 58.9%. This result was a 430 bps improvement over last year, largely due to reduced headcount which was down 13% year-over-year. The winter quarters typically have higher ORs, given the lower volume levels and more challenging operating conditions caused by weather, making this record OR feat all the more impressive.
In the quarter, EPS increased 11%. The company maintained its guidance for double-digit EPS growth in 2016. It also announced a 40% increase in its dividend (to CAD$2 annually) and authorized the repurchase of an additional 5% of its shares outstanding.
In November 2015, CP proposed a merger with Norfolk Southern (NS) that would have created meaningful value for both CP and NS shareholders while improving the North American rail network and enhancing service to customers. Despite the strategic and economic logic for this transaction, it was met with strong opposition from competitors, legislators and industry lobbyists. In light of this opposition, on April 11th, the company announced that it had terminated its efforts to merge with NS.
On April 22nd, the Pershing Square funds collectively sold 4.1 million shares of CP, or approximately 30% of our position, as the price increased substantially in recent weeks and became a disproportionately large percentage of the portfolio. We continue to have tremendous confidence in CP’s management and prospects, but have sold shares for portfolio management reasons.
From Bill Ackman (Trades, Portfolio)'s first quarter shareholder letter.
