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Investment Overview for CSX Corporation (NYSE:CSX)
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Below are key drivers of CSX's value that present opportunities for upside or downside to the current Trefis price estimate:
- CSX's EBITDA margin: We currently forecast CSX's EBITDA margin to increase from 39.7% in 2012 to 45% by the end of the Trefis forecast period, primarily driven by productivity initiatives being undertaken by the company. CSX aims to lower its operating ratio to mid-60's in the long run.
Growth in chemicals, automotive and intermodal segment is supporting the revenue growth for railroads. The intermodal segment, although less profitable than coal freight, carries high incremental margins as train lengths are extended. This is because the additional costs associated with adding containers and trailers to existing trains is low, particularly in comparison to the revenue potential. The recent double-stack initiatives further provide upside to margins.
There could be a downside of nearly 14% to the Trefis price estimate if the volume growth is below expectations due to lower-than-expected economic growth and the EBITDA margin only improves marginally to 40% at the end of Trefis forecast.
Coal Freight
- U.S. Rail Carloads of Coal: We currently forecast U.S. Rail Carloads of Coal to increase from 6.6 million in 2012 to 6.8 million by the end of the Trefis forecast period, as we expect an eventual recovery in domestic coal demand and solid export coal demand.
Export coal demand is more volatile than domestic demand. Flooding in Queensland, Australia in early 2011 provided a supply shock to the met coal market which contributed to stronger demand for U.S. export coal. A return of supply from Australia, continued domestic utility softness, decrease in natural gas prices and lower than expected economic growth could contribute to a downside of more than 8% to the Trefis price estimate if U.S. Rail Carloads of Coal decrease to 5 million by the end of the Trefis forecast period.
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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 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 20k rout miles serves many large population centers in 23 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 six major business segments: Coal Freight; Industrial Freight (which includes chemicals); Agricultural Freight; Intermodal Freight (freight which can be switched from train to another mode of transport like ships); Housing and Construction Freight; and Other Services which include revenue from 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.
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We believe the Coal Freight and Industrial Freight divisions are the most valuable divisions and contribute more than half of CSX's total value. The key factors responsible for this are:
Large volumes of coal freight
We believe the factors behind the coal freight volume growth are:
- Lately, coal demand in domestic electricity production has been subdued due to coal's closest competitor natural gas being favored by the utility companies as its environmentally friendly and relatively cheaper. However, overall coal volume is expected to grow as natural gas prices eventually increase.
- Given the strong exposure of CSX to export terminals, the company is well positioned to see high export coal volume growth rates. We expect export coal volume to expand substantially due to solid long-term global demand (particularly in Asia) and comparatively healthy international coal prices
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Increasing freight demands and productivity with eventual economic recovery
The freight railroad industry is highly sensitive to economic conditions. Volumes fell in 2008 considerably due to the economic slowdown, leading to a record decline in railroad freight revenues. Stronger economic conditions led to an increased demand for rail services across nearly all of CSX’s markets in 2010. The U.S. economy has been slowly recovering from the economic crisis and this bodes well for volumes in most segments, though we expect housing and construction to be slower to rebound.
Consistent pricing improvements
The pricing power of railroads with the long standing exemptions from regulation has been a key issue in the success of railroads. Railroads have steadily improved rates during the past 10 years primarily through legacy contracts renewals and repricing. Most rails claim to target long-term 4-5% annual price increases, or greater than railroad cost inflation.
Trefis Forecast Rationale for US Rail Carloads of Coal
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This represents the total carloads of coal shipped by railroads in the United States.
Carloads are used to determine the volume of freight that is shipped by a transportation company. Each container or trailer, not less than 10,000 pounds of one commodity from one consignor to one consignee, is counted as one carload.
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${forecast} have increased steadily since 2002 recession, as the rails have gained market share over truck carriers, given the long-haul characteristics of the moves, peaking in 2008 at nearly 8 million.
In 2009, carloads decreased to 7 million due to reduced freight demand as a result of the economic slowdown.
A decline in coal carloads also occurred in 2012, as total carloads hit 6.6 million in 2012, down from 7.32 million in 2011.
We expect this trend to reverse in 1-2 years and think that the coal volumes will eventually grow to around 7 million by the end of the Trefis forecast.
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Trefis considered the following factors for its forecast.
Supporting Factors
- Robust export coal demand
- Given the tight truckload capacity, rising international coal prices and strong long-term global demand (particularly in Asia), export coal demand is likely to grow, particularly benefiting the eastern rails due to their higher exposure to export volumes.
- Railroads gaining market share from truck carriers
- Eastern U.S. railroads are faced with stiff competition from the trucking industry due to the relatively shorter length of hauls. Rising fuel prices, a shortage of long-haul drivers and highway congestion is likely to hamper the trucking industry, encouraging railroads to gain market share.
- As fuel prices increase, railroad traffic rises as customers choose rail transport over trucking since it becomes cheaper.
- U.S. economy and production levels
- Freight demand has historically been correlated to U.S. GDP. World Bank forecasts that U.S. GDP will grow at a moderate rate of 2.4% in 2012, and 2.7% percent in 2013. Economic growth, albeit slight growth, should drive an increase in carloads.
Mitigating Factors
- Declining domestic coal demand
- Domestic coal production is declining as cheaper natural gas is becoming the preferred fuel for electricity generation. However, natural gas and coal are close competitors and we believe that as gas prices eventually start to rise, coal demand will improve. This should lead to an increase in coal freight demand. In the long-term, the eastern railroads should also benefit from longer haul lengths as future supply is sourced beyond Appalachia.
- Increasing coal inventory levels
- The movement of coal inventory levels of utility companies is an important factor behind domestic coal freight demand. Overall, coal inventory levels of utilities increased in 2009 due to reduced coal consumption and electricity demand. The depressed coal consumption lately is pushing these levels up further. We expect coal transportation to be subdued until the inventories approach more normal levels.
- Unforeseen weather disruptions
- Freight volumes are weather dependent and recent disruptions have significantly affected electricity generation fueled by coal. Although difficult to forecast, extreme weather conditions may pose a downside to freight volumes.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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