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After learning that Warren Buffett, the value investor's equivalent of A-Rod, was putting his money into U.S. Railroad firm, Burlington Northern Santa Fe (NYSE: BNI), railroad stocks suddenly became trendy. Driven by increasing consumption for commodities and transportation services, railroads have been targets for value investors for a long time. Buffett's investment put the industry back on the investment map.So, it wouldn't be surprising to see that hedge funds are playing the same hand. CSX Corp. (NYSE: CSX), a large integrated transportation company servicing everything from ports, trucks and rails, has been in the news lately as the target of an activist hedge fund based out of London, named the Children's Investment Fund.
The fund, started in 2003 by Chris Hohn, has been very active and successful in extracting shareholder value from a variety of situations. It forced the resignation of the Deutsche Borse CEO after he refused to abandon his plan to take over the London Stock Exchange.
It seems like the CIF hit a snag with CSX, though.
In response to the Fund's demands, CSX accepted none of them. In a great response sent by the CSX Board to TCI, management makes a strong case. You can read the letter here.
The company claims:
- CSX Surface Transportation comparable operating income has nearly doubled since the current management team took charge in 2004, while productivity and revenue initiatives during that period have improved the operating ratio to its best level in a decade.
- In the same period, shareholders have benefited from a stock price that has risen nearly 150 percent. CSX shares have significantly outperformed all major North American railroads and the broader market.
- Also in this period, safety and customer service levels have improved dramatically, as indicated by 25 percent to 50 percent improvements in most key safety and service measurements.
- CSX and its advisers have held numerous discussions with TCI and corresponded with them on its ideas. The board has frequently, actively and independently assessed TCI's proposals.
Who's right? I don't know. CSX has performed pretty well and the letter makes a good case for management's position. Could it have done better? Perhaps, and maybe with TCI looking closely over its shoulder, they will continue to perform. The interesting situation is that frequently activist investors make their presence felt even without extracting any concessions from managment. The oversight is, in and of itself, an extractor of value.
The best part of the whole back-and-forth was how CSX's Board signed its response to TCI:
Very truly yours,
The CSX Corporation Board of Directors
Gotta love it.
Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC., the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author holds no positions in the stocks mentioned above.
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