CSX is on the Right Track

05/22/2019 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Railroads are the arteries that pump raw materials and finished products through the growing U.S. economy. Within that group, CSX (CSX) has become the pace-setter for operating momentum, suggests Richard Moroney, editor of Dow Theory Forecasts.

For the 12 months ended March, CSX grew faster than any other S&P 1500 Index railroad for per-share profi ts (up 59%), revenue (up 9%), and cash from operations (up 43%). CSX’s network of 20,500 miles of track connects 23 states and two Canadian provinces to 70 ports east of the Mississippi River.

Its five biggest markets are chemicals (19% of revenue), coal (18%), intermodal (16%), agricultural and food products (11%), and automotive (10%).

With total volumes stagnating in the past couple years, CSX has relied on price hikes to drive sales growth. The company raised prices 5% last quarter, following increases of 6% in 2018 and 4% in 2017.

Even with the trucking market starting to soften, CSX continues to push through higher prices, largely due to recent service upgrades. With its service increasingly reliable, management expects to win more business from existing customers who tend to split up their shipments between rail and truck.

hat strategy may already be working — merchandise volume rose 3% in the March quarter after holding fl at in 2018. CSX has paired its pricing power with cost cuts, prying profit margins wider and driving free-cash-flow growth.

Operating profit margin has expanded in 19 straight quarters, with growth accelerating in the past five quarters. Free cash flow more than tripled to $2.37 billion for the 12 months ended March. CSX reduced its work force by 5% last year and seems confident it can slash an additional 6% to 7%.

One bright spot for the railroad’s volumes has been coal, rebounding 2% in 2017 and 4% in 2018. But a recent drop in coal prices has triggered concerns that exports may stall. For now, demand remains robust, reflected by CSX’s March-quarter coal volumes rising 5%.

Management says it has already locked in about 90% of its projected 2019 coal exports, securing much of that volume with fi xed commitments. Additionally, in the last quarter CSX poached a coal customer from Norfolk Southern (NSC), which has been plagued by service problems.

For 2019, CSX is expected to increase earnings per share 14% and revenue 3%. At 19 times trailing earnings, CSX is cheaper than any other stock in the railroad industry, which averages a P/E ratio of 21.

CSX trades at 18 times estimated 2019 earnings, versus its industry average of 19. The shares have returned 26% including dividends in 2019 and seem capable of rolling higher. If it meets the 2019 profit consensus of $4.37 per share and its trailing P/E rises to its industry average, the shares will reach $93 by early 2020.

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