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Canadian Pacific Railway to report earnings Friday ahead of key shareholder vote

Canadian Pacific Railway Ltd. (TSX:CP) will make a renewed pitch to shareholders Friday to try to convince them the railway is on the right track when the company reports its latest quarterly results.

Locked in a fight with its biggest shareholder, who wants to replace chief executive Fred Green, the railway is expected to report a significant improvement from a year earlier.

But whether that will be enough to convince shareholders to back the current management at the company’s annual meeting next month remains an open question.

BMO Capital Markets Fadi Chamoun said investors have been expecting a strong first quarter.

“Whether this is sufficient to shift sentiment around to CP Rail’s management and board remains to be seen, but it appears to be unlikely in our view,” Chamoun wrote in a note to clients.

New York-based hedge fund Pershing Square, which holds a 14.2 per cent interest in Canadian Pacific, has been locked in a bitter war of words with Canada’s second-largest railway for months.

Pershing chief executive officer Bill Ackman has called CP the worst-performing top tier railroad in the industry and put the blame on the company’s board and Green.

The investment firm has nominated a slate of seven prospective directors for election to CP’s 15-member board and is seeking the replacement of Green with Hunter Harrison, former CEO of rival Canadian National Railway Co. (TSX:CNR).

“Time and time again, the company has announced a new plan, shown a glimmer of operational improvement, only to fail to achieve sustained progress,” Ackman wrote in a letter to shareholders this week.

“The problems are probably not the plans themselves. Rather, the failure has been execution of those plans by management and the board’s inadequate oversight.”

CP’s annual meeting is set for May 17 in Calgary.

The railway has admitted that its performance last year was dismal, when weather-related issues in the winter and spring caused significant problems, but it has tried to assure investors that its multi-year strategy will bear fruit.

For its part last week, CP issued guidance for the quarter for earnings between 80 cents and 83 cents per share, sharply higher than the average of 65 cents per share that analysts had been expecting before the preview.

“While a mild winter may have been a factor in this strong performance, we believe the results also demonstrate that the company has begun to reap the benefits of recent investments in its infrastructure and lean initiatives,” Chamoun said.

RBC Capital Markets analyst Walter Spracklin said the company attributed the results to operating efficiency gains.

“As evidence of these achievements, management pointed to the company’s double-digit improvement in train speed, active cars on-line, terminal dwell, and car miles per day,” Spracklin wrote in a note to clients.

“We share management’s view as we believe CP’s recent operating improvements demonstrate real progress on the company’s operating initiatives and are not solely the product of favourable weather conditions.”

CP shares were up 39 cents at $76.47 on the Toronto Stock Exchange.

The stock was trading for about $63 before Pershing Square first disclosed its stake in the railway in October.