VALUATION HIGHLIGHTS
- Merchandise Freight constitutes 61% of the Trefis price estimate for CSX Corporation's stock.
- Intermodal Freight constitutes 16% of the Trefis price estimate for CSX Corporation's stock.
- Coal Freight constitutes 14% of the Trefis price estimate for CSX Corporation's stock.
WHAT HAS CHANGED?
- CSX Stock Performance
CSX stock has witnessed gains of 15% from levels of $30 in early January 2021 to around $35 in mid-October 2024, vs. an increase of about 50% for the S&P 500 over this period.
However, the increase in CSX stock has been far from consistent. Returns for the stock were 26% in 2021, -17% in 2022, and 14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that CSX underperformed the S&P in 2021 and 2023.
- Q3 2024 Performance
The company's top line of $3.6 billion reflected a 1% y-o-y growth, as a 3% growth in volume was offset by a 1% decline in pricing and lower other revenues. The company continued to face headwinds from lower coal export demand and a decline in coal shipment pricing. Lower fuel prices have resulted in lower fuel surcharge revenues. Looking at the bottom line, EPS stood at $0.46, slightly higher than $0.41 in the prior-year quarter.
- CSX's Operating Ratio
CSX has been focused on reducing its operating ratio. Despite the challenges during the pandemic, CSX reported a low figure of 58.8% in 2020, just 40 bps higher compared to 58.4% in 2019. In 2021, the company's operating ratio stood at 55.3%. And in 2023, the figure rose to 62.1% due to inflationary pressure. The company is expected to bring this metric under 60% going forward.
- Trends In Coal Shipments
With the increased use of cleaner sources of energy, such as natural gas, the demand for coal has dropped drastically over the last few years. Consequently, coal shipments have witnessed a decline. However, if there is any sharp movement in natural gas prices, it would result in higher coal demand. The coal export demand has remained strong in recent years, and this trend is expected to continue in the near term.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are the key drivers of CSX's value that present opportunities for upside or downside to the current Trefis price estimate:
- CSX's Revenue Per Carload of Coal: We currently forecast CSX's Revenue Per Carload of Coal to rise from $3,290 in 2023 to $3,741 by the end of the Trefis forecast period.
However, if this metric rises to around 5,000 levels by the end of our forecast period, driven by better price realization, it would result in a 5% upside to our price estimate.
- CSX's EBITDA margin: We currently forecast CSX's EBITDA margin to rise to 54%, compared to levels of 49% in 2023, primarily driven by productivity initiatives being undertaken by the company. There could be a downside of roughly 10% to the Trefis price estimate if the growth is below expectations and margins were to hover around 48% by the end of the Trefis forecast period, as opposed to 54% in our base case forecast.
BUSINESS SUMMARY
CSX is the leading railroad in the Eastern U.S., engaged primarily in freight transportation in the Southeast, East, and Midwest regions of the U.S.
CSX also transports overseas freight through the Atlantic and Gulf Coast ports in addition to providing freight to the Western U.S. through interchange with other railroads.
CSX's rail network of more than 20,000 route miles serves many large population centers in 26 states east of the Mississippi River in addition to Washington DC, Ontario, and Quebec. CSX's primary competitor is Norfolk Southern, which covers much of the same territory.
We have broken up our analysis of CSX into four major business segments: Coal Freight; Merchandise Freight (which includes chemicals, automotive, agriculture, and others), Intermodal Freight (freight that can be switched from train to another mode of transport), and Trucking & Others, which include revenue from trucking business and railroads that the company does not directly operate, revenue for customer volume commitments not met, and other items.
CSX's customers include steamship lines, vehicle manufacturers, agricultural companies, utilities, intermodal companies, and chemical manufacturers.
SOURCES OF VALUE
We believe that Merchandise Freight is the most valuable division for CSX. The key factors responsible for this are:
Tightening Trucking Capacity
Declining fleet sizes and inadequate availability of truck drivers have significantly tempered the freight transport capacity of the trucking industry. The Hours-of-Service safety regulation for commercial vehicle drivers has put pressure on trucking capacity by limiting the number of working hours for truck drivers. The tight trucking capacity may result in shifting of some of the freight volume to railroads. As the demand for railroads' services increases, so will their pricing power.
Growth In The U.S. economy
The U.S. has seen healthy growth in the past before the pandemic, driven by growth in sectors such as automotive, industrials, and housing. CSX has benefited from this growth through an increase in carloads for its Industrials, Housing & Construction, and Automotive segments. The economy is projected to grow in low single-digits in the next few years, and that should bode well for CSX.
