Hunter Harrison Joining Activist to Influence CSX
Former Canadian Pacific CEO is teaming up with an activist investor to try and boost results at CSX.
On Jan. 18, The Wall Street Journal indicated that Hunter Harrison is joining former Pershing Square investor Paul Hilal, who led the CP investment for Pershing and left in 2016 to launch his own Mantle Ridge fund, in an attempt to influence CSX (CSX). The WSJ indicates that Hilal has raised $1 billion for a single investment, with investors locked up for five years. Earlier on Jan. 18, CP announced that CEO Harrison, 72, will depart the firm immediately and Keith Creel, 47, will assume the helm on Jan. 31. He approached the board to discuss modifications to his postemployment agreement to pursue opportunities involving other railroads, and forfeits CAD 118 million in benefits and equity awards, but the board agreed to waive his noncompete obligation without waiving his nonsolicitation restrictions concerning senior CP employees.
We incorporated fourth-quarter results and raised our CSX fair value estimate to $41 from $37, with about half of the increase due to the time value of money and half due to better pricing than we previously projected, particularly in the still-significant coal market. Coal revenue per unit increased 6.2% in the fourth quarter and was down just 80 basis points in full 2016 (we projected a 5% decline). Also, owing to a strong fourth quarter, our full-year 9% volume decline was too bearish. The market may reward CSX shares based on the possibility of Harrison's engagement, but in our DCF model, holding all else equal, improving the operating ratio from our currently projected 65% in 2020 to 60% increases our fair value estimate by $5 to $46, and gradually improving the OR to 58% (CP's 2016 OR) increases our valuation to $49.
Another ramification could be openness to railroad mergers. We've long posited that two transcontinental railroads make sense in the U.S. We don't view this as reducing competition, as shippers already generally choose between just two originating railroads in U.S. regions; Canada has had two transcon rails for decades.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Keith Schoonmaker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.