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October 21, 2014 10:35 AM, EDT

Canadian Pacific Rail Misses Profit Estimates as Stock-Based Pay Rises

Canadian Pacific Railway Ltd.

Canadian Pacific Railway Ltd., foiled in a bid to merge with CSX Corp., reported third-quarter profit that missed analysts’ estimates as the carrier spent more on stock-based compensation.

Net income rose 23% to C$400 million ($355 million), or C$2.31 a share, the Calgary-based company said Oct. 21 in a statement. That trailed the C$2.38 average of estimates in a Bloomberg News survey of 26 analysts. Revenue increased 8.9% to C$1.67 billion, short of the C$1.69 billion average estimate.

 “They missed on margin and sales, but it wasn’t very much of a miss,” David Tyerman, an analyst at Canaccord Genuity who has a hold rating on Canadian Pacific, said in a telephone interview. “Overall I would call it a good performance, close enough. There was pretty strong growth year over year.”

The company is “on track to finish the year with CP’s strongest quarter to date,” Canadian Pacific said in a slide presentation posted on its website.

Canada’s second-largest railroad is working to deliver on a plan unveiled three weeks ago by Chief Executive Officer Hunter Harrison, to more than double profit over four years in part by running longer and faster trains.

Canadian Pacific said exploratory talks on a possible merger with CSX to form a transcontinental railroad have ended, while signaling it will keep pushing for consolidation.

CSX rejected an offer by Canadian Pacific to combine into a transcontinental railroad, people familiar with the matter said earlier this month.

Canadian Pacific is the first of the biggest publicly traded North American railroads to fall short of estimates in publishing third-quarter results.

Canadian Pacific’s operating ratio, an industry benchmark that compares expenses to revenue, improved 3.1 percentage points to 62.8%. The ratio will probably drop to “the low 60s” by the end of 2018, Harrison said Oct. 1.

“CP has gone from a short-term, watch the operating ratio story to a long-term sales growth story,” Tyerman said. “There is a general trend toward better results.”

Carloads rose 1.8% to 687,000, damped by declines in shipments of coal, autos and fertilizers, the company said.

Crude-by-rail drove the revenue gain, jumping 74% to C$136 million. Canadian grain sales advanced 17% to C$248 million, coal dropped 15% to C$150 million and automotive revenue fell 13% to C$83 million.