* CP stock is up 20 pct since end-June * CP has second highest PE ratio of North American railroads * CEO Harrison to lay out turnaround strategy Dec 4-5 * Harrison targeting big improvement in operating ratio * Economy, weather could hamper turnaround By Nicole Mordant VANCOUVER, Nov 18 Less than five months into the appointment of a hard-driving chief executive, industry laggard Canadian Pacific Railway Ltd is already showing signs of a turnaround, and investors have piled into the stock. The rapid rise has made the stock too rich for some investors concerned that the shares could tumble if Canada's second-biggest railway fails to reach its target of becoming one of North America's most efficient railroads in four years. An economic slowdown, a harsh winter, or renewed labor strife: analysts say plenty of things could still go wrong. "Our view is that it is not going to be a smooth road making the improvements that they want to make. We decided to take our profits and move on," said Michael Sprung, president of Toronto-based Sprung Investment Management, which sold its CP stock after a proxy battle ended in May with the ouster of the former CEO. CP stock rose to a record high this month, and it's up a whopping 20 percent since late June, when Hunter Harrison, a 50-year veteran of the railroad industry was appointed CEO. For the year, the stock is up 46 percent, dwarfing rival Canadian National Railway's 6 percent rise and the 2.4 percent fall on the Toronto Stock Exchange's benchmark S&P/TSX composite index. To be sure, many investors are likely to give Harrison, who is lauded for turning around two railroads in his lifetime, enough time to see his plans through. "As long as the investing community sees that he is able to make changes, the stock is likely to float with a little bit of elevated loftiness above where intrinsic value would be," said Morningstar analyst Keith Schoonmaker. Harrison is the former CEO of CP's larger rival Canadian National Railway (CN). He was handpicked for the CP job by the company's biggest shareholder, William Ackman's Pershing Square Capital Management Ltd, a New York-based hedge fund that owns some 14 percent of CP. Ackman launched a proxy contest in January to shake up CP's board and replace its CEO, whom he blamed for the company's longstanding underperformance. Both the former CEO and chairman quit in May, along with several board members. INVESTOR DAY The first big test for Harrison will come when he lays out his operating and financial strategy for CP at a meeting with industry analysts in New York Dec. 4-5. What the market most wants is a detailed road map of how Harrison plans to meet his promise of slashing CP's operating ratio from 74.1 percent in the third quarter to 65 percent in four years. The ratio is the gold-standard measure of efficiency in railroading. The lower the ratio, which measures a company's operating expenses as a percentage of its revenue, the more efficient the railroad. CP is the least efficient of North America's big six railroads. CN, with an operating ratio of 60.6 percent in the third quarter, is the industry leader. "That is going to be the critical test, when he will announce his plans," said independent railway analyst Tony Hatch. "I feel pretty good that he will not disappoint, that he knows what is expected of him, he knows how to beat expectations...," said New York-based Hatch, who has followed the rail sector for 25 years. SOME DOUBT Although RBC Capital Markets analyst Walter Spracklin regards Harrison as "an exceptional operator," he sees the ratio target as a challenge. At current levels, it "makes the shares vulnerable to disappointment should that target not be realized," he said in a recent note to clients. In 2011, harsh winter weather, including avalanches in British Columbia and heavy snow on the Prairies, knocked down CP's first-quarter profit. This year, second-quarter earnings fell partly due to a nine-day strike by locomotive engineers. RAPID CHANGE Harrison has not rested on his laurels since taking the reins at Calgary-based CP, which operates 15,000 miles (24,000 kilometers) of track across Canada and into the United States and employs nearly 14,500 people. He has taken over the role of chief operating officer himself, named a new chief financial officer, closed inefficient railyards, increased train speeds, simplified CP's intermodal network and cut headcount, especially at the head office. "The pace of change is phenomenal. In my lifetime I have never seen someone grab hold of a company so quickly and wrestle it to the ground," said Trains magazine writer Fred Frailey, who has been writing about the industry for 34 years. Although CP was already showing improvement under the previous management's growth plan, its progress has become more pronounced under Harrison. In his first quarter as CEO, CP's profit increased by 20 percent. As CP's share price has climbed, so has its price/earnings ratio, which is now the second-highest among North American railroads. At 21 times consensus earnings for 2012 and 16 times 2013 earnings, according to Thomson Reuters data, CP's PE ratio is above that of CN, a much more efficient railroad. CN trades at 15 times earnings for 2012 and 13 times 2013 earnings. The big valuation has given rise to red flags that may give investors second thoughts. Euro Pacific Capital analyst Mark Suarez believes CP's stock has peaked for now. "I think the economy is decelerating. Fundamentally for any train operator it is difficult to make drastic cost cuts when your volumes are going down," he said. "I think we are beginning to see the correction already over the last two weeks," he added. CP's stock hit a record high of C$94.44 on the Toronto Stock Exchange on Nov. 2. It closed at C$90.20 on Friday, down 25 Canadian cents.