CSX Corporation (NYSE:CSX), a leading railroad company, is primarily engaged in freight transportation across the eastern US. With a 21,000 route-mile rail network, it caters to cities in 23 states east of the Mississippi River, the District of Columbia as well as Canadian provinces of Ontario and Quebec. It posted revenues of $11.7 billion in 2012, in-line with the prior year. Its operating margin increased by 30 basis points to reach 29.4% in 2012.
Industrial products and coal are the key commodity groups for CSX which together account for almost 60% of its revenues. CSX posted strong growth in intermodal and industrial categories in 2012, and we feel it will continue to see higher volume within these segments in 2013 on account of its strategic investments and favorable market conditions. However, we believe weakness in coal and agricultural markets present major headwinds to the company which will affect its volume growth in 2013.
A Snapshot of CSX’s Different Units
Industrial products (which include chemicals, automotive and metals) and coal represent the key commodity groups, which accounted for 30% and 27% of CSX’s total revenues in 2012 respectively and around 55% of our stock value. Agricultural products, intermodal, housing and construction are the other key commodity groups which contributed 15%, 14% and 12% respectively of the company’s total revenues in 2012 and make up the remainder of the company’s valuation which we peg at $22.
Strong Demand In Intermodal and Industrial Segment
The intermodal and industrial products categories posted annual revenue growth of 11% and 10% respectively in 2012. These areas are supporting CSX’s growth given the headwinds in the agricultural and coal markets.
While intermodal volume rose by 7% annually in 2012, revenue per unit (RPU) within this segment rose by 4% y-o-y in 2012. Volumes grew due to increased demand from both domestic and international markets. We feel CSX will continue to show growth in this category in 2013 as it has made several strategic investments in this area to improve its service levels.
Industrial – Automotive and Chemical
Within industrial products, automotive freight revenues recorded annual growth of 23% followed by chemical freight revenues which posted a y-o-y increase of 5%.
Automotive freight volume grew by 18% with RPU rising by 5%. The higher production of light vehicles in North America contributed to this volume growth. While we feel that automotive shipments will continue to rise in 2013, y-o-y comparisons may be difficult due to a higher base.
Within the chemicals segment, volume and RPU grew by 2% and 3% annually in 2012 respectively. Higher shale gas drilling activity and growth in plastic shipments contributed to high demand within this segment. We believe this category will do well in 2013 as the oil and gas industry in North America is growing due to the shale gas boom.
Weakness in Coal and Agricultural Markets
Coal Weakness to Persist
The coal business represents a major headwind for all railroad companies including CSX. Coal revenues were down by 14% annually in 2012 on account of a 16% drop in volumes along with a 2% rise in RPU. The increased substitution of coal with cheaper natural gas to produce electricity is the main factor causing this trend. Additionally, lower electricity generation in the eastern US and high inventory levels also contributed to this drop. We believe these problems in the coal market will persist in 2013. Additionally, we feel CSX may not be able to raise RPU within this segment significantly due to pressure from exporters to keep US coal prices competitive in the global market.
Agricultural Products Face Headwinds
Revenues from core agricultural products (excluding phosphates, fertilizers, food and consumer products) posted a y-o-y decline of 4% due to a 7% volume decline and a 3% RPU increase. Volumes were affected by drought conditions in the Midwest which affected corn supply and led to higher corn prices and resulted in lower shipments of corn and ethanol. We feel this market will continue to stay challenging in the near term owing to high corn prices which will affect its shipments to feed mills.
We currently have a $21 price estimate for CSX, approximately in-line with the current market price.