Hunter Harrison eyes his next turnaround target

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As Hunter Harrison himself might say, it wouldn't be his first rodeo: Take charge at an underperforming railway, slash costs, boost profit and watch as his growing following of investors makes money.

Mr. Harrison's surprise departure as chief executive officer from Canadian Pacific Railway Ltd. has set the stage for a fourth attempt at this scenario.

The Memphis-born railroader is working with activist investor Paul Hilal's Mantle Ridge to move into the top job at Florida-based railway CSX Corp., according to people familiar with the matter.

Related: Rail stocks surge as Hunter Harrison joins push for CSX overhaul

Read more: Hunter Harrison steps down at CP to join push for change at U.S. railway

Mr. Harrison, 72, has been credited with turning around CP, Canadian National Railway Co. and Illinois Central. Investors, betting he could do the same at CSX, drove up its share price by 23 per cent to $45.51 (U.S.) on Thursday.

In a statement, CSX said it is willing to "evaluate" Mantle Ridge's views. A CSX spokesman noted CEO Michael Ward has not announced any plan to retire.

Fadi Chamoun, an analyst at Bank of Montreal, said improving CSX's revenue quality and operating performance could cut its operating ratio to 60 per cent from fiscal 2016's 70 per cent, excluding real estate gains. (An operating ratio compares expenses with revenue; lower is better.)

By Mr. Chamoun's calculations, this could boost CSX's stock price to $58 by next year, and to $69 by 2020. "This is similar to the strategy that Hunter Harrison employed successfully at CP Rail between 2012 and 2016," he said.

Anthony Hatch of ABH Consulting, a railway adviser in New York, cautions there are no easy comparisons between CP in 2012 and CSX in 2017.

The carriers and the markets they serve are much different, as bulk commodities have fallen in importance while service-sensitive container and merchandise shipping has risen, Mr. Hatch said.

And the Prairies of Western Canada offer long stretches of low-cost, long-haul travel, compared with the twisting railways that serve the densely populated cities of the U.S. Eastern Seaboard, he said by phone.

The density that CSX confronts daily brings operating problems as well as opportunities – the region is home to the richest and biggest markets in North America, including auto plants, oil refineries and several major ports. "Density is good and bad," Mr. Hatch said.

Furthermore, he pointed out that CP in 2012 had an industry-worst operating ratio of about 83. Mr. Harrison was able to slash costs and improve service to quickly reduce this figure to today's 56.

However, CSX is regarded as a well-run railway that many analysts say is their pick for the best of 2017, even before news of Mr. Harrison's move broke. CSX, partly in response to earlier overtures from CP, has tried to assuage shareholders by streamlining its operations. Its operating ratio in the mid-60s and EBITDA margin of 42 per cent stand among the better of the big North American carriers, even after its coal revenue has fallen by $2-billion.

"CSX's operating ratio is much higher, but if you give them back the coal business it wouldn't be," Mr. Hatch said. "I think the CSX team is doing a pretty darn good job."

Still, he can see reasons why it would not pay to bet against Mr. Harrison revamping CSX. "I've never met a real railroader who doesn't think that Hunter wouldn't accelerate positive productivity change at any carrier he went to, just by the sheer force of his personalty, his conviction in the plan.".

CSX's long-serving CEO has no obvious replacement among the three younger executives who work for him, Mr. Hatch said, proposing a scenario in which Mr. Harrison as CEO could quickly pick a successor, groom the person for the top job and retire in a few years.