BMO Sees 24% Upside In CSX Shares, Upgrades To Outperform

BMO upgraded CSX Corporation CSX to Outperform from Market Perform on predication that Mantle Ridge LP being successful in its effort to install Hunter Harrison as CEO of CSX.

“We believe that the probability of this occurring is fairly high without going down the road of a bruising proxy battle,” analyst Fadi Chamoun wrote in a note.

An optimal cost structure could materially improve the revenue growth opportunity as CSX's network operates in a high freight density area. If Harrison comes to CSX, operating ratio could improve to the 60 percent mark in three to five years.

“We believe that the precision railroading model, with consistent and robust service and a significantly lower cost structure, could meaningfully expand the market opportunity,” Chamoun wrote in a note.

The analyst also noted that operating improvements would result boost free cash flow that in turn could be redeployed towards share repurchases (EPS accretive).

Meanwhile, Chamoun raised the price target to $55 from $38. That said, if Mantle Ridge fails to bring Harrison, the analyst believes the stock could trade back to around $35-36.

On the other hand, if Mantle Ridge is successful in deploying Harrison as CEO, the analyst sees the stock popping to $55-60 in the next 12 months. He also projects potential upside of $80-87 over the medium term, assuming success in achieving the 60-58 percent operating ratio goal.

At last check, shares of CSX rose 2 percent to $45.26.