CSX Corporation’s (NYSE:CSX) stock has had a more or less flat 2012, falling around 5% year-to-date and trading in a range of $24-$20 for most of the year. In comparison, its closest competitor Norfolk Southern (NYSE:NSC) saw a 15% decline in stock price during the year. This difference can be attributed to CSX’s management ability to quickly cut costs to offset a fall in coal freight demand, which allowed the company to retain profits while NSC’s earnings dropped 25% during Q3.
We think the weak demand for coal freight services will continue over the next year, making CSX’s margin trends the most important factor for the company’s profitability. Additionally, we think that growth in CSX’s industrial freight and agricultural freight segments will be crucial as they can offset any falls in its coal business.
CSX Must Continue Efficiency Trends
Over the past couple of quarters, CSX has done a good job with improving the efficiency of its trains. For example, during the third quarter of 2012, the company increased its on-time originations and arrivals to 90% and 80%, respectively. Additionally, terminal dwell decreased to 23.2 hours from 25.5 hours and velocity increased to 23 mph from 21 mph year-over-year.
We think these efficiency gains are important and indicate that CSX is using all its assets to generate as much revenue as possible. If management continues to decrease the time that trains are in a terminal, it would lead to fewer idle assets and lower fixed costs. Overall, if CSX is able to maintain or improve these gains going forward, we could see an improvement in its operating ratio and consequently overall profits.
Industrial and Agricultural Revenues Key
With the decline in coal freight revenues, CSX’s industrial freight revenues and agricultural revenues are the keys to maintain top-line growth. These two revenue streams faced different industry dynamics during 2012 as agricultural revenues fell due to a drought in the United States and industrial revenue grew due to an increase in demand in the US automotive industry.
If the US harvest during 2013 is normal by historical standards, we expect that agricultural revenues would see an increase year-over-year. However, on the other hand, if automotive demand reverts to the mean and falls, CSX’s industrial freight revenues could see a hit in 2013. Overall, we will have to wait and see how these two trends play out in 2013, but both will be key to CSX revenues during the year.
Economic Growth Risks Remain
CSX’s growth, like growth for any other railroad company, is correlated with growth of the global economy. Unfortunately, over the next year or so, global economic growth is expected to be “slow and bumpy.” The IMF cut its global growth forecasts to 3.6%, down from an estimate of 3.9% in June 2012, with warnings about the risk of future cuts. 
Additionally, the unresolved fiscal cliff situation in the United States and the Euro crisis will have to see positive ends during 2013 for the world economy to grow at a substantial pace. If both these issues are further pushed down the road or result in negative developments in 2013, the world economy could be pushed back into recession. If this happens, CSX’s revenues will likely take a substantial hit.
We currently have a $22 price estimate for CSX, which is about 10% above the current market price.Notes: