Deutsche Bank Upgrades CSX To Buy; Says 'In Hunter We Trust'

Deutsche Bank has upgraded CSX Corporation CSX as its recent discussion with Mantle Ridge CEO Paul Hilal suggests profitability improvements are likely to be achieved within three years versus brokerage’s prior five-year assumption.

Hunter Harrison

Shares of railroad operator have benefited from talks of former CEO of Canadian Pacific Railway Limited (USA) CP Hunter Harrison taking over as chief executive. Harrison, who announced an early departure from Canadian Pacific, is trying to secure a senior management position at CSX with support from Hilal.

Deutsche Bank Commentary

Following talks with Hilal, Deutsche Bank says the potential new management team is targeting 58 percent operating ratio (OR) and 15 percent capex (as percentage of sales) inside of three years, with the majority of heavy lifting done within 18 months.

“Our pf P&L model implies $3.80 in EPS by 2020, which translates to 25 percent EPS CAGR vs. 2017e. We also see an almost tripling of free cash flow after dividends over the same period, all of which is driven by higher earnings,” analyst Amit Mehrotra wrote in a note.

Related Link: Why CSX Isn't The Only M&A Target In The Rail Space Right Now

The analyst assumes OR reaches 58.6 percent in 2020 (vs. 69.6 percent estimated in 2017), with 50 percent of the cumulative improvement realized in 2018, 30 percent in 2019 and the remaining 20 percent in 2020.

In addition, Mehrotra assumes labor costs reduce to 19.1 percent of sales by 2020 versus estimated 27.4 percent in 2017 and assume net debt declines by just over $1 billion at 2020's year end (versus the year's end of 2017).

What Harrison Would Mean For CSX

“Assuming Hunter Harrison is appointed CEO and Mantle Ridge’s Board requests are met, our aforementioned estimates translate to a $60 share price by YE’17,” Mehrotra continued.

Further, the analyst raised his target price to $56 from $42, implying 15 percent potential upside from current levels.

At last check, shares of CSX had risen 1.40 percent to $49.39.