Hunter Harrison Joining Activist to Influence 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

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.

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