- We believe the intermodal segment represents a significant long-term growth driver for CSX.
- The intermodal segment has huge market potential on account of significant domestic truck-to-rail conversion opportunity and rising U.S. international trade.
- While we forecast CSX’s intermodal volumes to rise at around 3%-5% over our forecast horizon, an increase in this growth rate provides meaningful upside to the current price estimate for CSX’s stock.
CSX Corporation (NYSE:CSX) is among the leading railroad companies in the eastern U.S. The company carries several types of freight including industrial freight, coal freight, intermodal freight, agricultural freight, and housing and construction commodities freight. We believe the intermodal segment, which comprises around 15% of our valuation for CSX’s stock, represents a significant growth catalyst for the company.
There is huge potential in the domestic intermodal market with the total Eastern domestic truck to rail conversion opportunity estimated at 9 million truck loads by CSX’s management. In addition, the rising U.S. international trade also lends to high demand in the international intermodal segment. CSX is making several efforts to tap this market potential such as expanding and opening new terminals and educating cargo owners on the benefits of its intermodal service.
While we have priced in CSX’s intermodal volumes to increase by 3%-5% over our forecast horizon in our $23.10 price estimate for the company’s stock, if growth reaches 10% annually, this adds 10% upside to our valuation.
What are the growth opportunities in the intermodal segment?
Significant growth opportunities are present in both the domestic and international intermodal segment:
- Domestic intermodal: CSX’s management estimates the total domestic truck to rail conversion opportunity in the Eastern region at around 9 million truck loads (this includes truckload transportation greater than 550 miles). Trucks are losing market share to railroads in the intermodal segment on account of various reasons such as rising costs, regulations, and highway congestion and infrastructure issues. Since CSX’s domestic market currently includes only around 1.2 million units, there is tremendous growth potential in this market. 
- International intermodal: While the international intermodal market is more mature as compared to the domestic intermodal market, increasing U.S. international trade presents growth opportunities in this segment. According to Global Insight, U.S. international trade is forecast to rise from $12.6 billion in 2012 to $14.2 billion in 2015, representing a CAGR of 4.1% during the period.  Since CSX’s network covers around two-thirds of the U.S. population, the company aims to benefit from this trend.
What are the key initiatives being taken by CSX to grow its intermodal business?
CSX is taking various measures to achieve long-term profitable growth in the intermodal segment, including:-
- Investments to increase capacity:
- In 2013, CSX is working on the expansion of various terminals at Atlanta, Columbus, Boston, Detroit, Louisville, etc. to provide 500,000 units of incremental lift capacity to its intermodal network in 2013 alone. 
- CSX is also building two new terminals at Montreal and Winter Haven (Florida), which will be ready by the end of 2014.
- New terminals at Baltimore and Pittsburgh are also being planned.
- Expansion of double stacked cleared lanes:
- CSX aims to expand the percentage of intermodal volumes that are carried through double stacked cleared lanes from 90% currently to around 93% by 2015, by working on various infrastructure programs. Double stacked lanes allow CSX to transport twice as many containers hence contributing to enhanced profitability.
- Through an initiative called the highway-to-rail (H2R) program, CSX aims to educate cargo owners on the benefits of the company’s intermodal service, which will help speed up truck-to-rail conversion in the area.
How will this impact CSX’s valuation?
CSX’s intermodal volumes rose from 1.9 million in 2009 to 2.5 million in 2012, representing an increase of around 32% over the period. Based on the growth opportunities present in the market and the initiatives being taken by the company, we expect CSX’s intermodal volumes to rise at around 3%-5% annually over our forecast horizon.
However, if CSX’s intermodal units rise at a much faster rate of 10% annually over our forecast horizon, then it represents around 10% upside to our current price estimate. (This growth forecast is possible under a scenario wherein U.S. rail intermodal units increase at around 5%-6% annually and CSX’s share in the overall rail intermodal market grows rapidly over our forecast period.)
Our $23.10 price estimate for CSX is broadly in line with the current market price.Notes:
- CSX Corporation’s CFO Presents at Deutsche Bank Global Industrials and Basic Materials Conference (Transcript), Seeking Alpha, June 12, 2013 [↩] [↩] [↩]