What Does The Recent Top Management Shake-Up Mean For CSX?
CSX Corporation announced the appointment of E. Hunter Harrison as CEO earlier this week, after a two month long negotiation between the company’s board of directors and activist hedge fund Mantle Ridge, which owns a 4.9% stake in CSX. [1] [2] The appointment of Mr. Harrison was accompanied by changes in CSX’s board of directors, with Mantle Ridge’s nominees receiving five seats in CSX’s thirteen member board. [1] The appointment of Mr. Harrison has been well received by the market, as illustrated by the sharp run up in CSX’s stock price over the past two months in anticipation of potential top management changes.
CSX Stock Price, Source: Google Finance
Mr. Harrison is a railroad industry veteran with a reputation for engineering turnarounds in the industry. In his latest role as the CEO of Canadian Pacific, Mr. Harrison oversaw an improvement in the company’s operating ratio (operating expenses as a % of revenue) from 81% in 2011 to 59% in 2016. [3]
CSX, which reported a 50 basis points year-over-year improvement in its operating ratio to 69.4% in 2016, has reported operating ratios around the 70% mark over the past five years. [4] The profitability of the company’s operations has been negatively impacted by a sharp decline in the demand for coal from utilities amid an environment of soft natural gas prices over the past five years. CSX’s coal shipments have declined by nearly 35% over the past five years. [4] As a result, the company has focused on cost reduction, with cumulative job cuts since 2012 amounting to around 20% of the company’s workforce. [3] Investors expect Mr. Harrison to drive more aggressive gains in profits at CSX, which is why his appointment has been well received by the market.
Mr. Harrison’s plans include implementing the ‘Precision Scheduled Railroading’ model at CSX, which involves making freight deliveries to a strict schedule and stringent monitoring of adherence to the schedule. [5] CSX reported a 65% rate for on-time destination arrivals in 2016. [4] By improving service levels, the new CEO expects to steer some freight business away from trucking companies towards CSX. [3] Mr. Harrison could also shift some of CSX’s operations away from the Rust Belt states of Michigan and Pennsylvania to more economically robust Southern states. [6] This is likely to involve the closure of some rail yards and further job cuts. Thus, Mr. Harrison is likely to make CSX’s operations focused on its more profitable routes.
While Mr. Harrison’s intentions of improving CSX’s profitability are quite clear, we will be looking out for more details on how the new CEO plans to achieve his objectives. With more information on the steps that CSX plans to undertake in the near term, we will suitably modify various assumptions in our model to arrive at a revised price estimate for the company.
Have more questions about CSX? See the links below.
- Why Has CSX’s Stock Price Risen Sharply Over The Past Week?
- CSX’s Q1 2016 Earnings Preview: Decline In Shipment Volumes And Fuel Surcharge Revenue To Negatively Impact Results
- What’s Next For CSX Stock After A 12% Rise Last Year?
- What Next For CSX Stock After A 19% Fall In Q3 Earnings?
- Should You Pick Humana Over CSX Stock For The Next Three Years?
- CSX’s Top Line To Decline In Q2?
- Will CSX Stock Recover To Its Pre-Inflation Shock Level?
- Here’s What To Expect From CSX’s Q1
Notes:
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Notes:- CSX Names E. Hunter Harrison as Chief Executive Officer, CSX News Release [↩] [↩]
- CSX Agrees to Hire Hunter Harrison as CEO, Wall Street Journal [↩]
- New CSX CEO Hunter Harrison eyes yard closures, truckers’ market share to lift profits, The Financial Express [↩] [↩] [↩]
- CSX’s 2016 10-K, SEC [↩] [↩] [↩]
- Test of Time: Canadian Railroad Begins Scheduling With Precision, Wall Street Journal [↩]
- CSX to name Hunter Harrison CEO as part of activist-investor revamp, Market Watch [↩]