Performance of companies
Introduction
The performance of companies is crucial for shareholders. The performance is what determines whether shareholders get returns on their investment or not. CEOs are the heads of organizations and the policies they implement may have different impacts on the performance of the company. CEOs have a direct impact on company performance depending on the other circumstances. New CEOs can improve performance or worsen things for non-performing companies. Thus, several factors influence whether a CEO will perform better than their predecessors or not. Based on his previous performance in different organizations, the proposed new CEO seems to understand the rail business and can perform better.
CP vs. CSX Financial Performance
It will be crucial to compare the performance of major competitors of CSX in the railway transport industry. One of the major competitors includes the Canadian Pacific, which is headed by Hunter Harrison. The comparison period between the two companies will provide the performance of CP under Harrison who is the proposed CEO at CSX. First, we compare the revenues of the two organizations in the five years.
A comparison of the revenues shows that CSX generated more revenues than CP in the five-year time. For CSX the lowest revenue reported is $11.069 billion, which happened in 2016. For CP, the lowest revenue reported is $5.695 billion in 2012. One common trend between the revenue of the two companies is that they are steady. The variation between the lowest and the highest revenues is small within the five years.
Next, we compare the profitability ratios of the two companies. The graph below shows the trend of the return on equity of the companies.
From the results of the Return on Equity (ROE), CSX is recording a decline in its ROE over the five years. In 2012, the ROE was 20.7 and reduced to 14.7 in 2016. The decline in ROE implies that CSX’s efficiency in using shareholder’s equity to generate profits is gradually declining. Due to the decline, the management team is becoming less efficient year after year from 2012 to 2016 in utilizing investment financing to grow the business. On the other hand, CP is recording increase ROE. In 2012, the ROE was merely 9.5 and at the end of the five years, the ROE grew to 34.6. The tremendous increase in ROE signifies a great improvement in regards to the efficiency of turning shareholder equity to profits. The management of CP under the leadership of Harrison is increasingly becoming more efficient if utilizing the funds they are given to grow the company.
The return on assets of the companies will provide more insights on how the companies can generate income from the assets they already have. The following bar chart generated from excel compares the ROA of the companies.
The chart shows that the ROA for CSX has been declining over the five years. The ROA declined from 6.1 in 2012 to 4.8 in 2016. The decline in ROA for CSX shows that the company’s management is becoming less and less efficient in utilizing available assets to generate profits for investors. CP on the other side seems to be doing well regarding ROA. Its ROA increased significantly from 3.3 in 2012 to 8.3 in 2016. The improvement in performance illustrates the top management’s efficiency in utilizing assets to generate profits.
Valuation and Stock Price Change
Although the CSX revenue is significantly higher than CP’s revenue, the price per earning for the two companies is almost the same. The price per earnings for CSX in 2016 is 19.9, while for CP is 17.9 in the same year. CP’s stock is valued almost the same as CSX because the company’s financial performance is improving steadily as compared to CSX’s performance that is declining. Shareholder’s confidence increases due to the improvement in the financial performance of CP; hence, increasing the value of its stock. On the other hand, the financial performance of CSX reduces investor confidence, which hinders the value of its stock.
Activist Investors
Good management should welcome activist investors to the company. Since activist investors buy a significantly large amount of shares and try to control major decision-making in the company, they are instrumental in drive positive change. If the current management is not delivering the best performance financially, new ideas are needed. New ideas can turn around performance. The opinions of activist investors are respected. New ideas from activists stand better chances of implementation than ideas from individual investors. If they can succeed in changing the top management of the company and install a CEO of their choice, activist investors can change how assets and shareholder equity is utilized. Activist investors will also help in pushing the value of the stock up since they buy many shares within a short time, which increases the demand for the company’s shares.
Harrison’s Worth and Voting Decision
I think Hunter Harrison is worth the $300 million compensation package. Based on his track record, he is a performer who can turn a poorly performing company into a profitable company. From the analysis, CP’s performance began to improve when Harrison was appointed CEO. As the CEO, he turned things around for CP even with little assets and investor equity as compared to CSX. He increased the company’s profitability and stabilized its stock value.
As an investor, I would vote in support of the package because Hunter Harrison will most likely help revive the profitability of the company. His exemplary performance as the CEO of CP is the basis for my support. With the wide asset base and investor equity at CSX, Harrison will definitely generate a lot of profit using them. His management policies imply that he can efficiently use assets and equity to generate profits. I would also support the entry of an activist investor into the company. The activist investor will ensure that Hunter Harrison is employed as the CEO, which will help improve the performance of the company.