Takeout Speculation Becomes Catalyst For CSX, Stock Hits 52-Week High

Following the surprise announcement of CEO Hunter Harrison's resignation from Canadian Pacific Railway Limited (USA) CP, the Wall Street Journal reported that he would be partnering with activist investor Paul Hilal to pursue CSX Corporation CSX.

In resigning before the completion of his contract, Harrison forfeits benefits and awards worth about C$118 million from Canadian Pacific.

The WSJ report of the involvement of an activist investor considerably increases the likelihood of Harrison joining either CSX or Norfolk Southern Corp. NSC, and “we view CSX as more logical than NSC given Jim Squires is relatively new in his tenure (started as NSC's CEO in June 2015) in relation to Ward (who began as CSX's CEO in January 2003),” Baird’s Benjamin J. Hartford said in a report.

A Catalyst For CSX

CSX rose more than 12 percent after hours, trading above the high end of its historical representative range. This could be justified “given CSX's growth potential using Harrison's track record as a guide,” Hartford commented.

Canadian Pacific achieved EBIT margin expansion from ~18.7 percent in 2011, before Harrison joined as CEO, to ~41.4 percent in 2016. Hartford noted, however, that CSX's 2016 EBIT margin is significantly higher, which limits the upside opportunity relative to Canadian Pacific.

The analyst expects speculation of a potential activist involvement to “discount the potential for accelerating EPS growth, supporting a valuation multiple at/above the top end of CSX's historical range.” He added that Harrison's efforts may also rekindle talks of rail M&A, which is “a potential catalyst for rails broadly.”

Baird has an Outperform rating on CSX and a Neutral rating on Norfolk Southern.