Morningstar names CP’s Harrison 2013 CEO of the Year

Written by William C. Vantuono, Editor-in-Chief

Independent investment research provider Morningstar, Inc. has named Canadian Pacific chief executive E. Hunter Harrison as its 2013 CEO of the Year. Morningstar annually recognizes a chief executive “who exhibits exemplary corporate stewardship, demonstrates independent thinking, creates lasting value for shareholders, and has put his or her stamp on an industry.”

“This year’s nominees have demonstrated sound stewardship practices on behalf of their firms’ shareholders,” said Heather Brilliant, head of global equity and corporate credit research for Morningstar. “We selected Harrison as this year’s winner because Canadian Pacific has produced outstanding results since his appointment as CEO in June 2012. Harrison has now transformed three railroads in his career, and along the way forged a new standard of profitability in a two-centuries-old industry.”

Harrison, Railway Age’s 2002 Railroader of the Year, was selected over Darren Gee of Peyto Exploration & Development Corp. and John Martin of Gilead Science Inc. for Morningstar’s award.

“It would be difficult to identify another company leader who has revolutionized operations within a mature, asset-intensive industry several times over,” Brilliant said. “Earlier in his career, Harrison steered both the CN and Illinois Central railways to industry-leading margins. His actions in 2013 improved operations for the benefit of Canadian Pacific employees, customers, and shareholders, and positioned the firm for future success.

“Harrison has been a powerful catalyst for change at Canadian Pacific. Following his appointment, he streamlined leadership, operating practices, and assets, both human and steel. He replaced nearly all senior leadership, decreased the work force by 27%, and reduced company-controlled railcars and locomotives by 35% and 43%, respectively. He relocated the firm’s headquarters from downtown Calgary, Alberta, to Ogden Yard, a move that cut costs but also keeps CP’s focus on freight operations front and center for corporate employees. CP is on track to produce a nearly 30% operating margin in 2013 and targets a 35% margin in 2014, a figure nearly double 2011’s level. Shares have soared to C$160.65 as of Dec. 31, 2013, far above the C$70 price in January 2012, when public correspondence between the firm’s board and activist investor Pershing Square mentioned Harrison’s name as a potential new CEO. In 2013, CP’s 61% total return dwarfed the returns of the S&P 500 (32%) and the Dow Jones Transportation Index (41%).

“Remarkably, Harrison has made these changes to CP’s business without harming customer service. The firm’s higher margins and greater return on invested capital will generate additional free cash flow, which can be invested in a virtuous cycle to enhance safety, operations, and customer service, thereby driving down costs even further. We believe this trend will enhance CP’s cost advantage—a key source of its Wide Economic Moat™ rating. CP’s Wide Economic Moat™ is also based on efficient scale; CP has a difficult-to-replicate network of track and assets and operates in an industry effectively served by existing participants.”

Morningstar describes its Economic Moat™ rating as “a proprietary measure of a company’s sustainable competitive advantages. Morningstar assigns each company a rating of Wide, Narrow, or None. A company can obtain an economic moat through five primary sources: Efficient Scale (a limited market where there is little incentive for new entrants), Network Effect (a situation where incremental customers add value for existing customers), Cost Advantage (allowing a company a greater profit margin and/or the ability to steal market share), Intangible Assets (e.g. patents or strong brands), and Switching Costs (making it costly in time and/or money for customers to switch providers).”

Morningstar introduced its CEO of the Year award in January 2000. Winners are chosen by senior members of Morningstar’s equity analyst team based on their independent research.

(Morningstar, Inc. is a provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 437,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 10 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has approximately $176 billion in assets under advisement or management as of Sept. 30, 2013. The company has operations in 27 countries.)

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