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Investment Overview for CSX Corporation (NYSE:CSX)
Below are the 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 39.6% in 2012 to 45% by the end of the Trefis forecast period, primarily driven by productivity initiatives being undertaken by the company. CSX plans to achieve operating ratio in the high-60′s by 2015 and mid-60′s over the long term by undertaking productivity and efficiency initiatives.
Growth in chemicals, automotive and intermodal segment is supporting 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 15% 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.
- U.S. Rail Carloads of Coal: We currently forecast U.S. Rail Carloads of Coal to increase from 6.6 million in 2012 to 6.7 million by the end of the Trefis forecast period, as we expect an eventual recovery in domestic coal demand and solid export coal demand.
There could be 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. This could happen if a large number of utilities shift to natural gas (instead of coal)and in the event of lower than expected economic growth.
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 route 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.
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:
Recovery could take place in the coal segment
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. The decline in coal inventory levels at utilities will further support recovery in the coal market in 2013.
- 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).
Increasing freight demands and productivity with eventual economic recovery
The freight railroad industry is highly sensitive to economic conditions. Volumes fall during economic crisis leading to a decline in railroad freight revenues. The U.S. economy has been slowly recovering from the economic crisis and this bodes well for volumes in most segments. The recent rebound in the housing market in 2013, further supports recovery in the economy. This is expected to impact the railroads favorably.
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 contracts renewals and repricing. Most rails claim to target long-term 4-5% annual price increases, or greater than railroad cost inflation.
Weak coal market
Coal segment volumes are expected to fall by 5%-10% annually in 2013, owing to increased competition from natural gas, high inventory levels and reduced demand for overall electricity generation. The outlook for this segment remains uncertain in 2014 as well and factors such as natural gas price, coal inventory levels will determine the overall demand for coal freight during the year.
How 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.
See more on: DCF Methodology
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