Board Changes at Canadian Pacific

One of the leading Canadian railroads, Canadian Pacific Railway Limited (CP - Analyst Report) has announced the resignation of its board member Tony Ingram, who belonged to the old management team led by former chief executive officer (CEO), Fred Green.

Following the resignation of president and CEO Fred Green and chairman John Cleghorn, Canadian Pacific registered a series of management changes. These include stepping down of old board members from the new management team formed under the direction of William Ackman.

Following the annual general meeting on May 17, the company announced the names of the 16 directors including William Ackman, one of the major stake holders in Canadian Pacific and the key person to stir organizational changes succeeded in appointing Hunter Harrison as the new CEO of the company. Hunter Harrison formerly served as the CEO of Canadian National Railway (CNI - Analyst Report).

Given the managment changes in Canadian Pacific, we believe the railroad’s fight with its eminent investor, Ackman has finally reached a settlement. In January, Ackman, who owns approximately 12% stakes in Canadian Pacific proposed a plan to replace CEO Fred Green with Hunter Harrison, former CEO of rival Canadian National (CNI - Analyst Report). Ackman’s policy to bring improvements in Canadian Pacific beginning with a change in CEO was however, previously condemned by the board of directors.

Management stated that under the directions Fred Green the company has been working towards successful execution of it Multi-Year Plan that endorses volume growth, network expansion and costs control measures, driving operating ratio in low 70s in next three years.

On the basis of these growth goals the company has so far realized significant synergies, as evident by the improvement in operating ratio compared to 2010 results despite a slowing economy. On continued implementation of the long-term plan, management expects further improvements in Canadian Pacific’s financial performance.

However, we believe that the resignation of Fred Green and changes in the board reflect the faith of the shareholders on Ackman for turning around the fate of the company.

The second quarter Zacks estimate for the stock is pegged at 93 cents with a year over year growth rate of 30.52%. For fiscal 2012 and 2013, the Zacks estimates remains at $4.40 and $5.35 with a year over year growth rate of 41.01% and 21.57%, respectively.

Consequently, we have a Neutral recommendation on Canadian Pacific. For the short term (1-3 months), the company has a Zacks #3 Rank (Hold).