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Stock Analyst Update

What Hunter Harrison's Passing Means for CSX

The railroading legend set a new standard for the operating margins and asset efficiency North American railroads can accomplish.

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CSX (CSX) announced on Dec. 16 that its CEO Hunter Harrison, 73, has died. Harrison started his career as a laborer at the Frisco, and ended it after he turned around three large railroads from near-worst-in-class performance to best. Harrison set a new standard for the operating margins and asset efficiency North American railroads can accomplish.

We reduced our fair value estimate Friday to $51 from $54 as we incorporated slower operating ratio improvement than we assumed prior to the announcement of his medical leave. We maintain this updated fair value estimate, but we expect the market to punish shares even more severely than Friday's 7.6% decline. Were shares to decline to the $45 range (4 stars), we would consider this a buying opportunity.

Two months ago CSX hired James Foote, 63, as COO, and we expect the board will rely on Foote to continue implementation of the precision railroading model; this may include promotion to CEO. Foote led  Canadian National's (CNI) sales group from 2000 to 2009, while Harrison was COO of CN from 1998 to 2003 and CEO from 2003 to 2009. CSX has hired numerous midlevel operations managers from CN to help implement precision railroading on the ground.

On a call Friday, Foote indicated he believed Harrison already accomplished much of the heavy lifting in closing and repurposing yards and facilities, as well as in beginning to transform the intermodal strategy away from unit trains and a hub-and-spoke model. We would not be surprised to see Foote bring on board additional operations personnel who intimately understand Harrison's proven operating model. 

In our view, Harrison's longtime operations understudy, Keith Creel, now CEO of  Canadian Pacific (CP), would have the greatest probability of maintaining Harrison's pace. However, CP believes it has Creel locked in place with legal agreements, and we are unaware of his interest in another turnaround, particularly now that he has the top seat at CP, where much of its transformation is completed.

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Keith Schoonmaker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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