What Now for CSX? Foote Seen by Analysts as Staying as CEO, at Least in the Short Term

It remains an open question whether James. M. Foote will lead CSX long term, but many analysts believe the CSX board of directors will keep him in the short term as acting CEO in order to provide stability.

Foote became the acting CEO last Thursday after CEO E. Hunter Harrison took a medical leave of absence for a still undisclosed illness. Harrison died at his Florida home on Saturday.

“I do expect Jim to be named CEO, although I also think the board will proactively study (and look to fill) any gaps in the team,” said Taylor Glasebrook, associate portfolio manager at Neuberger Berman, the No. 8 shareholder in CSX with 10.5 million shares.

“We believe that Mr. Foote’s presence in the senior leadership team provides an important source of continuity,” Cherilyn Radbourne, a TD Securities analyst, wrote in a note to clients.

But Radbourne also noted, as have others, that Foote lacks experience in operations, having spent most of his four decade railroad career in marketing and sales.

“Our biggest concern is that Mr. Foote’s primary area of expertise is sales and marketing versus operations, and the senior management team now lacks a member with an operating background,” Radbourne wrote.

“He is a competent, experienced railroader who is familiar with precision railroading,” said John Larkin, an analyst with Stifel Equity Research. “He has been in place for a couple of months and has a head start on any others. The company has underdone enough uncertainty over the past couple of years and needs some stability.”

What Harrison’s death means for CSX in the long term is being debated by railroad industry observers.

“Harrison’s legendary ability to redesign a rail network with his Precision Scheduled Railroading model created the two most efficient operations in North America and we believe his legacy will continue at CSX,” J.P. Morgan analyst Brian Ossenbeck wrote on Sunday.

But Renny Ponvert, CEO of Management CV Inc., which analyzes top hires for money managers, told The Wall Street Journal, that hiring Harrison “was a classic triumph of short-term thinking over long-term sustainability.”

Povert said the CSX board “took a high-beta risk that appeared to pay off for the first six months. Now, they’re stuck with a consequence that could expose long-term shareholders.”

Bloomberg columnist Brooke Sutherland summed up what happened in the lead to her story this way: “CSX Corp. shareholders paid $84 million for Hunter Harrison. They’re now getting James Foote.”

In January when word got out that Harrison and the Mantle Ridge hedge fund were targeting CSX, the company’s stock value jumped 23 percent in one day.

One news report said CSX stock value has risen 48 percent this year and about 6 percent since March when Harrison took over.

The stock value fell on Friday about 10 percent, but then stabilized. On Monday CSX stock value rose 1.25 percent to $53.42.

Investors will be looking to a January CSX announcement of its fourth quarter 2017 performance for clues as to what the company plans to do going forward.

CSX also plans to hold an investors conference next March. By then the board may have already named Foote the permanent CEO and hired a chief operating officer.

Before his death, Harrison had purged the top executive ranks of most CSX holdovers.

Most of that shakeup came in late October and also brought Foote to the company to oversee operations and marketing.

Harrison had also been bringing in former Canadian National managers who understand his precision scheduled railroading model.

During a series of “Hunter camps,” which were intensive seminars led by Harrison himself that explained the concepts of precision scheduled railroading, he had identified what he termed “rock stars” who showed promise of understanding the model and being able to implement it.

CSX has signaled that it intends to continue to operate on the PSR model but some analysts have been debating whether it has the management team it needs to continue to oversee it.

Foote contended last Friday before Harrison death that most of the work in implementing PSR has been done and CSX had the people in place to fine tune things.

Some believe Foote and the current CSX management team might be better suited than was Harrison to soothe relations with shippers and employees who were upset at the rapid pace of change that Harrison brought to CSX and which resulted in service issues during the summer and early fall.

Yet some continue to doubt that Foote is the long-term answer for CSX.

“Even though Jim Foote is a capable leader we do not see him as the long-term solution as the CEO given his strength is marketing and the company is embarking on an operations-focused turnaround,” Cowen and Co. analyst Jason Seidl said in a note.

There has also been speculation in the wake of Harrison’s death that some CSX shareholders might launch litigation against the CSX board for breach of duty for having hired a CEO they knew had health issues.

The board had initially demanded that Harrison submit his medical records for review by an independent physician.

Harrison refused and the board backed down after Harrison submitted a letter from his doctor saying he was fit for the job.

One news account quoted two unnamed corporate attorneys as saying it might be difficult to win such a lawsuit because of Harrison’s known medical condition.

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