Shareholders overwhelmingly approved the CEO's rich compensation package, despite his undisclosed health condition.
On June 5, CSX
indicated that 93% of its shareholder vote approved new CEO Hunter Harrison's $84 million compensation package. This was our expected outcome because Harrison indicated he would resign if it was declined, and we believed the share price would immediately tank upon his departure. We are unaware of issues preventing Harrison from working as effectively at CSX as he did at Canadian Pacific, and we maintain our fair value estimate and wide moat rating.
Keith Schoonmaker, CFA, is director of industrials equity research for Morningstar.
A recent Wall Street Journal
article cited concerns about Harrison's use of supplementary oxygen, his 2015 leave of absence from the CP CEO role due to pneumonia and other health issues, and his working from his Florida home rather than from CSX's headquarters. However, he has conducted railroad business from home for many years, and the results during his leadership of CP are indisputable. Harrison used supplementary oxygen during the June 5 general shareholder meeting and indicated the board is aware of his medical condition. CSX board chairman Edward Kelly indicated the board was satisfied that there is no health issue impairing Harrison's performance as CEO.
Our discounted cash flow-derived $52 fair value estimate assumes Harrison will catalyze operating ratio improvement from 69.4% in 2016 (before his arrival) to 60.0% in 2021, at the conclusion of his four-year contract. While we believe the railroad could improve its OR without Harrison in charge, we would expect this to occur at a slower pace. If, for example, CSX were to better its OR to only 64% by 2021, our fair value estimate decreases to $47.50.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.