CP Rail profit down; stock drops with other rails

By Nicole Mordant

VANCOUVER, British Columbia (Reuters) - Canadian Pacific Railway Ltd reported a smaller than expected 29 percent drop in quarterly operating earnings on Tuesday, but its stock fell along with other North American railroads on bleak U.S. consumer confidence data.

CP shares fell 3.9 percent, its larger domestic rival Canadian National Railway Co shed 2.2 percent and U.S. peer Union Pacific Corp dropped 4.3 percent on concerns over continued weakness in the U.S. job market.

Railways, because of the wide variety of products they ship, are considered leading indicators of the economy and usually gain or lose first from signs of a recovery or dip.

"I wouldn't attribute the weakness to CP specifically, but to broader macro concerns. (CP's) results were better than expected," said Raymond James analyst Steve Hansen.

CP, which operates in both Canada and the northern United States, said on Tuesday its operating income fell to C$144 million, or 85 Canadian cents a share, for the third quarter, ended September 30 as traffic volumes sagged along with the weak economy.

The results were ahead of analyst forecasts of 78 Canadian cents a share, according to Thomson Reuters I/B/E/S, as Canada's No.2 railway cut costs and operated more efficiently.

Quarterly revenue fell 20 percent to C$1.1 billion compared with analyst expectations of C$1.07 billion.

CP's operating expenses decreased 20 percent to C$827 million in the quarter while its operating ratio, a key measure that compares working expenses to earnings, was largely unchanged at 76 percent.

Despite the weak performance of CP and other railroad stocks on Tuesday, RBC Capital Markets analyst Walter Spracklin was optimistic about the sector's outlook.

"Overall, I very much like the railroad industry over the next year to two years. Even if we are not in a recovery phase, and we just trend along at current levels, we should see some growth over what was a very depressed volume period last year," Spracklin told Reuters.

"If we are in a recovery period and we do see some increase in demand, then that growth, year over year, could be closer to double digits," he said.

CP's stock was down C$1.89, or 3.9 percent, at C$46.84 early Tuesday afternoon. The stock is up about 19 percent so far this year.

($1=$1.07 Canadian)

(Additional reporting by Euan Rocha; editing by Rob Wilson)