CSX Investors Are All Ears for Harrison Pitch to Run Carrier
If most CSX Corp. investors are like Sandy Pomeroy and T.J. McConville, Hunter Harrison will probably have a fourth railroad to run.
Pomeroy, a fund manager with Neuberger Berman Group, backs Harrison taking over as CEO of CSX with a playbook that increased efficiency, profits and the stock price at Canadian Pacific Railway Ltd. McConville, whose firm Becker Capital Management owns 1.5 million CSX shares, is eager to see Harrison’s plan to cut costs after his performance at three other companies.
“We hope that he can go and be accepted by the CSX shareholder base and board, and he can come in and really work his magic,” said Pomeroy, whose firm owns 10.7 million CSX shares. “You would think the company would embrace the idea, not be opposed to it.”
Harrison, who came out of retirement in 2012 at the behest of investor Bill Ackman to slash Canadian Pacific’s costs by more than C$688 million ($526 million) over four years, was Ackman’s point man on a board coup at Canadian Pacific and opened his own fund last year — to target years, while revenue rose. He’s now teaming up with Paul Hilal, Bloomberg News reported Jan. 18.
Harrison walked away from C$118 million in benefits and awards at Canadian Pacific in exchange for a limited noncompetition agreement that frees him up to take a chief executive officer job at any carrier but Canadian National Railway Co., BNSF Railway Co. or Union Pacific Corp.
“If it appears that having Hunter Harrison come into the firm will more quickly unlock the value that we’ve seen in the company for a couple of years now, we’d support that,” McConville said.
Under Harrison’s leadership, Canadian Pacific’s annual operating ratio — a measure of efficiency in which a lower number is better — plummeted to less than 59% last year from 83% in 2012. Over the period, net income more than tripled to about C$1.6 billion last year from C$484 million in 2012.
Jim Hall, chief investment officer of Canada’s Mawer Investment Management, expects to see Harrison take up a senior role at CSX. The 72-year-old career railroader previously ran Canadian National Railway Co. and Illinois Central in addition to Canadian Pacific.
“Hunter is three-for-three on turning around railroads, and I’m highly confident he will go four-for-four,” said Hall, whose Calgary-based firm oversees about C$40 billion in assets and owns shares of both Canadian National and Canadian Pacific.
While Mawer doesn’t currently own any CSX stock, Hall said Harrison’s arrival would be enough to make him consider investing in the railroad.
Harrison stepped down from Canadian Pacific on Jan. 18, about five months before his contract expired. Reports that he would jump into the fray at Jacksonville, Florida-based CSX sent the stock of the U.S. railroad soaring 23% the following day.
Every percentage point of operating ratio improvement adds a dime to per-share earnings. CSX’s ratio is now about 70%. If Harrison can drive the ratio to the low 60s, “that’s a pretty meaningful kind of number,” McConville said.
If Harrison fails to get CSX’s top job, “I think there would be some disappointment near term in the stock,” he said.
To be sure, Harrison’s zeal for cutting costs may not be the solution for CSX, which has grappled with declining revenue the last two years. The railroad needs an executive that can boost sales, said John Larkin, an analyst with Stifel Nicolaus & Co. Also, railroads in the eastern U.S., including Norfolk Southern Corp., operate in densely populated areas and mountainous areas that make it tough to operate.
If CSX rejects Harrison and Hilal’s plan to take over the railroad, the pair would have to name a slate of 12 board members by Feb. 10 ahead of the railroad’s May annual shareholders meeting. With Harrison’s track record at Canadian Pacific, it may be easier to win over investors.
“I’m going on the idea that everyone would view it as a win-win for CSX,” Pomeroy said.
