In this segment of the Market Foolery podcast, host Chris Hill is joined by Stock Advisor Canada's Taylor Muckerman to consider the passing on Sunday of respected rail industry executive Hunter Harrison at age 73, just two days after he went on medical leave, and only about nine months after he took the helm of CSX (NASDAQ:CSX). Investors and insiders saw him as a strong choice to lead -- and transform -- the company, and his death changes the thesis around it.
A full transcript follows the video.
This video was recorded on Dec. 18, 2017.
Chris Hill: The sad news from CSX, the railroad company. The CEO, Hunter Harrison, has died following complications from a recent illness. And just on Friday, CSX announced that Harrison was going to be taking a medical leave of absence, and Jim Foote, the chief operating officer, was named acting CEO. I remember when we first talked about Hunter Harrison coming to CSX, and one of the things you had said was he has this amazing track record in the industry; he is older. I believe he was 73 --
Taylor Muckerman: He was, yeah.
Hill: I didn't realize that he was ill.
Muckerman: They didn't really make it publicly known, because when CSX brought him on board, they had tried to make the stipulation that they wanted outside independent doctors to assess his health, but he put the kibosh on that and basically said, you're going to listen to my doctors or I'm not going to take the job. So they chose to listen to his doctor, who apparently just wrote a two-sentence note saying he was fine and could lead the company. Unfortunately, passed prematurely, and he still had a few years left on the contract.
Hill: We saw shares of CSX just on Friday drop about 8% just on the news. It's basically stabilized today. But this really does seem to be one of those business leaders who was part of the thesis for investing in CSX, I suppose.
Muckerman: Oh, yeah, I think he was almost entirely the thesis. Before he was made the CEO, when he and the hedge fund that were trying to wiggle their way in, they announced they were going to challenge for a CEO spot and some board seats, the stock shot up about 25% in a single day, thus basically forcing the hand of CSX to bring him on board, and now you're seeing the stock retreat as a result. He's come in and made dramatic changes already, but there's still a lot of work to be done.
And now you just have to wonder if the folks that are still there that remain are capable of that, because he was trying to change the whole operating psychology there. And the way that they do business as a railroad, over toward the point to point versus the hub model that they had used, they're trying to become a CN Rail or a Canadian Pacific, the two rails that he led to great success before CSX. Now they're kind of stuck right in the middle of that. Granted, Jim Foote worked at CN Rail with Hunter Harrison for a little over a decade. So he has experience with what Hunter Harrison was trying to do. But now it's all on his shoulders.
Hill: So if you are a shareholder of this company, do you sell your shares, or do you wait and see? And all of this is unfolding very quickly, so Jim Foote still has the word acting in front of his title. Listeners, go ahead and assume he is named the CEO of this company. Do you hold on to your shares?
Muckerman: I think you could certainly adopt the wait-and-see mindset with this. Although the company, even before Hunter Harrison stepped in, was seeing headwinds from the industries it services, most notably coal. They've seen coal revenues drop significantly over the last few years. Hunter Harrison blatantly said that fossil fuels are dead when he took the role, and said he didn't expect coal to be part of the company's revenue stream for much longer, certainly not in the next five to 10 years. But he did say that he wants CSX to ship the last railcar of coal on a U.S. railroad. So you have to climb revenues in one of their previously biggest segments, and now this upheaval in the C-Suite. They lost their chief marketing officer, who departed before Hunter Harrison came on, supposedly the heir apparent to the CEO role, and then that role has been vacated now. So they have some holes to fill, not only in Hunter Harrison's shoes, but now a few levels below Jim Foote's. I'd adopt a wait-and-see mindset. Just listen to what Jim Foote has to say. They have an investor day coming in March. Maybe you'll learn something then and make a decision based on that.