Eastern Railroad Discussion > CSX: Is this the worst rail investment right now?

The website seekingalpha hosts an investment opinion that CSX's board is muddling along, and likely to commit to an expensive contract which will tear the company apart.  Other comments take the opposite position, arguing Hunter Harrison will shape up the company and get its operating ratio into the 50s.

Investment sites tend to be like trainorders in that there is a wide diversity of opinion. One guy believes coal is coming back, which would be huge for CSX. Others disagree on CSX coal ever coming back.  Harrison's health, and his refusal to hand over health records, are a concern.  The term key-man is used as well. In business speak, that often describes a person n whom large insurance policies are purchased, to protect the company in case of death or serious disability of an important leader.

MY COMMENT - There are at least three major interests in play here. 

--The CSX board is weak, and needs to be replaced. It gets poor marks on share owner representation, note the public complaint from State Street.  While it has approved a vigorous restructuring plan, that should have happened 10 years ago. With Ward and Gooden gone, the company is not being managed on a day to day basis at the senior level. Don't expect to see any major shifts in execs, this is a care taker plan.

--Mantle Ridge is likely sitting on a modest gain from its 4% holding. Depending on when it bought the shares and what it paid in carrying costs, it may be underwater if EHH demands Mantle Ridge pay the costs of the benefits he gave up at CP. That's a real problem if Mantle Ridge has to mount a proxy fight.

--EHH may be in the position of wanting to go to work, get his board seat, and start Precision Railroading.  It appears CSX has given the OK for that, but not for the other board seats demanded by Mantle Ridge. Unless Mantle Ridge OKs the deal, and they won't do that until CSX gives them seats and the right to the $300mn payout, EHH can't take the job.  (Mantle Ridge knows what happens to the Children's Fund when they accepted a minority position on the board. They were boxed in. Lost money, and slinked off in the dark.)

FWIW, I closed out my CSX position at a decent gain. While $50 is possible, I think there's much more risk to the downside on the stock price right now.


Is this the BEST case scenario?

I personally have believed all along that the smart people are those who sold; not those who bought.  I have read and believe reports that the stock is overvalued with or without Harrison.
ALLEN

 



Edited 1 time(s). Last edit at 04/13/17 15:09 by darkcloud.

Let's use some ballpark figures to get some perspective on this.  Assume Mantle Ridge bought their position at $35.  Their 4% of 926,450,000 shares outstanding is 37,058,000.  The shares closed Friday a few pennies short of $48.50.  Using the assumption, Mantle Ridge has a $500,283,000 gain.  Since Mantle Ridge wants CSX to pay the EHH pay/perk package I think they would indeed go the proxy route to get enough directors on the board to make that happen.  I don't foresee MR having much trouble doing this since the majority of shareholders (all, not just institutional) will support the MR nominees to protect their 30% plus gains.  
As for the EHH "magic of precision railroading", let's try a few more numbers.  If EHH is able to initially increase CSX earnings 25% that would put per share earnings around $2.25.  At a PE ratio of 20 the share price would be $45, $3.50 less than what it is now.  If EHH shows stronger results than that maybe he can get a 25 PE and move the shares closer to $56.  With the wild cards of his age, health and economic uncertainty, I'm not a buyer.  That said, I never thought Amazon would have the run it has had.  

Kennard Britton
Bedford, TX

If you were buying stocks TODAY,If you bought stocks 25 years ago i would not get in any hurry to sell them,.After they get rid of a 1000 personal and make a few changes there stock will go back up,Its a long term Investment...Scoob

The smart people sold.
CSX is already planning on cutting about 1000 employees. At a rough estimate of a $150,000 each, this reduction will produce a savings in total of $150 Million/Yr ongoing exclusive of severance costs. This savings will increase their Operating Income about 4.5%.
CSX stock is already overvalued with or without Harrison.
Harrison wants $300 Million. He needs to save a lot of money to pay for this. He is in his seventies and plans to work three years. CSX needs a long-term vision, plan, and ceo.
Mantle Ridge with a 4% stake wants 50% control to bring Harrison to the game.
None of this adds up.
If I owned stock in CSX (thankfully I don’t), I would vote against a Mantle Ridge slate.
Voting for it defies logic.
ALLEN

I tend to agree with the idea that CSX needs a leader that is going to be at the helm for a long tenure, not some short term quick fix which is what EHH seems to offer at this point in his life.  I also don't believe that you can drive the operating ratio on a railroad like CSX into the 50's, or even close.  Not if you want to conduct any real business.   I mean if you earn 10 dollars, and spend 5 dollars doing it, your operating ratio looks great but what have you actually accomplished?

Really bold steps, like dropping the right of way into a real estate trust could move the stock. But, I don't see that in EHH plans.

For one thing, it would almost certainly require open access.

Posted from Android

Its crazy to see them doing this and blowing all this money with EHH as they could just as
easily hack and whack a mole without him and buy up NS and its portion of conrail.

If they bypassed begging for EHH to visit for a while they could certainly attempt go after all
the less than carload lots.


 

 

It reminds me of the late 90's--Conrail had been shrinking and shrinking, had a reputation for turning down and running off "small" business and was talking of finally rationalizing into its much vaunted "X" system. Here's CSX, retrenching, deemphasizing routes without even cashing them out by selling to shortline operators, running Chicago Great Western style manifests and, like Conrail, making noise of shrinking (into an traingle rather than an X).  If investors and other railroads see value in something besides this hunker down/shrink mentality, they're going to pounce, a'la Conrail (which ironically was targeted by CSX).  CSX needs to either grow business, provide service and invest across its system OR be broken up. The strategy of the last year has served nobody very well.  EHH very likely COULD show them a thing or two about velocity and asset utilization.  I haven't checked, but cars online and locomotives needed would have to have increased by dropping speeds and taking circuitous routings, and as I mentioned, if you're going to take the long way around, sell off the newly moribund routes (what they now call "feeder" lines).  Numerous places exist that the "feeders" could be used to institute UP style directional running--increase velocity and decrease recrews IF they're not going to sell off the feeders anyway.  Eliminates the need for siding extensions, etc.

Just the two cents of an investor and life long observer.

im michael wards 14 yrs as ceo of csx. the carload business went from 4,972,000 carloads to 3,613,000 or a decrease of -1.9% per year and the intermodal 2,119.000 to 2,757,000 carloads of
increase of 1.4% per year.

kennbritt Wrote:
-------------------------------------------------------
.  If EHH is able to
> initially increase CSX earnings 25%
>
> Kennard Britton
> Bedford, TX

I would point out that EHH has not increased revenue in any of his previous positions.   With the "Scheduled Railroad" being largely, if not entirely, an exercise in smoke and mirrors and with the personnel reductions already announced, EHH is going to be hard-pressed to come up with additional shortterm savings that would translate into a 25% increase in earnings.

Gordon

Gordon,

Precisely my point.  To get the type of earnings increase to support the current share price will be difficult.

KLB
 

Like CP, Hunter Harrison would tear through CSX's assets and claim them as profit. SO much of what he did to us was one time sales of anything deemed not worth keeping by him. I'm talking anything. Switch frogs, rail cars, locomotives, sections of our railroad. CSX has so much of that. He would toally boost that place to the unknowledgable shareholders. He'll press pause on the growth of the company for however many years leaving them at a disadvantage for the future. All at the financial gain of the company, and when it's dripped dry, poof, he's out. 

We topped out at $220 in 2014 at CP after his sale of the DME west, scraping of many assets, sale of much property, and running a few trains in there too. 

It's easy to cook the books. Move little freight "very eficiently" and of course your ratio goes down. But net profits also go down. More with less, and CSX has a lot to lose, and once it's gone. There's almost no way to get it back.

Well, the CSX sounds like the Ole SP back in the 1980’s..deferred maintenance on track and locomotives, anything to make the stock price look good. We all know what happened to the Southern Pacific, as a result of this. Just one example was the Duffy Street Run-away in 1989, a result of locomotive deferred maintenance. Only 50%, of six locomotives, had working dynamic brakes, going down a 2.5% grade.  CSX people tell me, they have slow orders that are never fixed, main- line track speed lowered to 25mph in places to save money. Let’s face it, a railroad is a high maintenance company/operation. If you have "bean counters" and non railroad people running the place, that’s a recipe for failure. CSX is nothing but a “Wooden Axle” outfit. They have MAJOR labor problems through out their system. How could this CP man be any worse? Maybe the System should be broken up and sold. 
Here is a sentence for a Warren Buffett article, under Western Roads posts.
“He(Buffett) sees BNSF as an incredible network of routes, with hard working people. An asset which cannot be replicated, but requires constant investment to remain at full capability.”
Did you read the part? “But requires constant investment to remain at full capability.” 
Do I need to translate that for the CSX people? It means, if you’re going to cook the books and not fix your tracks and plant, you’ll pay the price down the pike.



Edited 1 time(s). Last edit at 02/28/17 09:30 by HardYellow.

Sadly, I imagine the CSX board would tell you that if the numbers don't look good today, they won't be around to worry about tomorrow.  BNSF is in an enviable position of having to answer to one man, and it's a man that actually shows some understanding of how railroads work.

The Berkshire letter also notes that if BNSF simply invested the amount it charges off as depreciation into new track and equipment, they would fall behind the competition. Just re-investing the minimum isn't sufficient to compete any longer.  They re-invest a lot more, they say.

(The accounting of depreciation is often way wide of the need to maintain and upgrade assets which see considerable wear and tear.)

The ancillary isue is investing in your people, and enabling them to do much more. Railroads have long flubbed that opportunity.

Lackawanna484 Wrote:
-------------------------------------------------------

> The ancillary isue is investing in your people,
> and enabling them to do much more. Railroads have
> long flubbed that opportunity.

AND, I would say, CSX is the Poster Boy of "flubbed opportunity, " with it's employes, especially the operating department.

 



Edited 3 time(s). Last edit at 04/13/17 15:10 by darkcloud.

darkcloud Wrote:
-------------------------------------------------------
> CSX has its problems and I have my gripes, but you
> seem to have a habit of taking what you 'hear'
> from the other side of the country about CSX and
> blowing it up way out of proportion.  There are
> usually some drama queens and BS artists in every
> crew room, try exercising some common sense.
>

Darkcloud...you could be correct. I’m only going by what all my CSX friends tell me. I have read through many of the CSX operating rules...and there are some strange ones. But, that’s what you get when a lawyer writes the rule book. UPRR has basically done the same. I can only go by what they, friends, complain about and the stories passed on. One thing that cannot be denied...CSX seems to really use a lot of patch crews to get their trains from point A to point B. NOW, that’s not a good thing.