Longer trains will help CP

CANADIAN PACIFIC RAILWAY LTD. $52.02 (Toronto symbol CP; Shares outstanding: 170.7 million; Market cap: $8.2 billion; TSINetwork Rating: Average; Dividend yield: 2.3%; www.cpr.ca) reports that its operating ratio worsened in the three months ended June 30, 2011, to 81.8% from 77.8% a year earlier. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower the ratio, the better.)

Bad weather slowed the company’s shipments during the quarter; that was the main reason for the change. CP still aims to cut its operating ratio to around 70% in the next three to four years. To meet this goal, it will run longer trains and work more closely with its main customers to speed up the loading and unloading of cargo.

A good example is CP’s new long-term deal with Teck Resources Ltd., which sells coal from its mines in B.C. to steelmakers in Asia.

Under the deal, CP is upgrading the tracks from Teck’s mines to handle longer trains. Teck plans to increase its production by 30% over the next two years, and longer trains will help CP profit from that expansion.

CP Railway is a buy.