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CSX, presenting for first time since Harrison death, gets positive reviews from analysts

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CSX stock rose Thursday while broader market indexes were plunging, as analysts appear to like what they heard at the railroad's first investor's day meeting Thursday with analysts.

On Friday, in early trading, CSX stock was down 10 cts, to $54.42 at 10 a.m., also a far better performance than the early selloff in broader markets. 

The meeting was the first such appearance in front of analysts since James Foote took over as CEO following the sudden mid-December death of his predecessor, railroad legend Hunter Harrison. Harrison was implementing his philosophy of "precision railroading" at CSX when he died in mid-December. The precision railroading philosophy involves less hub-and-spoke scheduling and more point-to-point trains, fewer "hump yards" where trains are taken apart and put together in new aggregations, and putting more cargo into each railcar. 

Harrison took over early last year, and turmoil ensued as he began to implement his changes. But there were also several positive metrics being recorded, even as shippers were complaining about poor service. Analysts who heard the presentation, and whose reports have been obtained by FreightWaves, were positive in their assessment. 

Bascome Majors at Susquehanna Financial Group said Foote and the management team at the meeting "came across as cohesive, with palpable conviction in executing the transformation (Hunter) started a year ago." Susquehanna's rating on the stock remained at "Positive."

"We believe CSX presented a more unified management front than most investors expected, with a sense of real conviction toward executing the multi-year plan in place and delivering industry-leading profit and cash flow growth," the Susquehanna recap said.

The criticism of pre-Harrison practices can be seen in the titles of the management slides. "CSX behaved as separate companies" was the title of one slide, over a map showing the various railroad segments throughout the east, south and Ohio Valley as separate entities. "Lack of integration led to inefficient handling" was the title of another. Other graphics show numbers of train cars being repackaged into smaller trains, with the same number of crew. 

Another slide shows that previously the company had nine divisions and 12 hump yards, with a plan to get it down to four regions and four hump yards. According to the company slides, CSX weekly train velocity is up 30% from the third quarter of 2017, and weekly car dwell in hours is down 22%.

In its fourth quarter and year-end earnings, CSX said its full-year adjusted operating ratio for 2017 was 66.3%. At the investor's day meeting, management said its goal was to get that down to 60% by 2020.

According to various analyst reports, and the CSX Power Point presentation, management is looking at 20% efficiency gains and cutbacks in numerous areas. It believes that full implementation of precision railroading can lead to a 20% reduction in cars, a 23% gain in employee efficiency (and the management slides showed that process already is underway), a 20% reduction in locomotives, and a 10% reduction in fuel use, driven both by the fewer locomotives and other efficiency steps. It also projects a reduction in headcount by 2020 to 21,000 from the current level of 27,200.

Susquehanna's recap of the attempt to implement change--always difficult--was positive. "As expected, senior management painted a picture of moderating resistance from rank-and-file employees and buy-in sharply improving since the peak of CSX’s operating struggles this summer," it wrote in its report. "That said, front-line execution remains a hard-to-handicap but real risk to the multi-year plan, albeit a risk we’re happy to bear as long as CSX’s operating metrics continue to trounce peers," which Susquehanna said is currently the case.

Merrill Lynch also reiterates its buy rating, with a target price of $60.

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