A Railroad on the Fast Track

04/03/2008 12:00 am EST

Focus: STOCKS

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of the Forbes Growth Investor, says one of the nation’s leading railroads is in very good shape to continue performing well.)

CSX (NYSE: CSX) is one of two major railroad operators in the eastern US. Norfolk Southern (NYSE: NSC) is the other.  CSX’s fleet includes over 4,000 locomotives and 94,000 railcars. Its territory includes 23 states east of the Mississippi River, the District of Columbia, Quebec, and Ontario.

The freight transport industry is struggling with softening economic conditions and soaring fuel prices. The trucking industry is plagued with highway congestion, driver shortages, and high fuel prices. However, railroads are benefiting from tight capacity, favorable pricing, improving performance measures, and comparatively attractive fuel efficiencies.

Operations in the Rail segment fall into four categories: merchandise, which produced 50% of 2007 net revenues, transports chemicals, forest products, agricultural products, metals, phosphates, and fertilizers, food and consumer goods.

The Coal category, [which] produced 26% of revenues, hauls coal, coke, and iron ore to power plants, marine terminals, steel manufacturers, and other industrial facilities. The Automotive category produced 8% of revenues. It delivers finished vehicles and parts.

The remaining revenues came from the Intermodal segment, which combines the cost efficiencies of rail transport with the flexibility of trucking. This segment primarily hauls manufactured consumer goods. CSX also owns and operates a real estate company and a luxury resort.

CSX’s net revenues grew 4.9% in 2007 to $10 billion. Management launched an initiative in 2004 to enhance performance metrics such as on-time originations and arrivals, average velocity, and dwell time. It also focused on reducing personal injuries and accidents.

These efforts helped boost profits. The operating profit margin jumped from 12.4% in 2004 to 18% in 2005 to 22.2% in 2007. Pro forma net income jumped 17% in 2007 to $1.2 billion or $2.70 per share. GAAP net income grew 5.2% year-over-year to $365 million or 86 cents per share.

Investment risks include an economic recession and high fuel costs. Management anticipates continued weakness in the housing and automotive industries. However, it also anticipates strong demand to continue for agricultural products, chemicals, metals, phosphate, fertilizer, coal, coke, and iron ore.

[Management’s] first-quarter 2008 guidance calls for 70 to 73 cents per share in earnings. For the full year, CSX expects to earn $3.40 to 3.60 per share. Management also expects operating profit margin to hit 30% by 2010 and operating income to climb 13% to 15% annually until then. Per share earnings growth will be even more robust thanks to a $2.4- billion share buyback plan. Finally, a 20% dividend increase signals management’s confidence in the company’s prospects.

(The stock closed below $58 Wednesday, near its 52-week high—Editor.)

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