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Investment Overview for CSX Corporation (NYSE:CSX)
- Rising coal shipments
- Rising natural gas has strengthened the demand for coal from utilities, reversing the decline in coal shipments over much of 2016. In addition, the U.S. government's plans to boost coal production through easing restrictive environmental regulations should translate into rising coal shipments going forward.
- Greater infrastructure spending plans to boost prospects of railroads
- A change in government post the 2016 U.S. presidential election could boost the business prospects of transportation companies such as CSX. The U.S. government has promised a $1 trillion overhaul of domestic infrastructure, with an emphasis on transportation infrastructure, including railways. Improvements in transportation infrastructure as well as a boost to economic growth from the pro-business policies of the federal government should boost the shipments of railroad companies such as CSX.
- Rising oil prices to translate into higher fuel prices
- Crude oil prices have strengthened considerably over the course of the past few months in the wake of OPEC's production cuts amid firming demand conditions. This is likely to be reflected in an increase in fuel costs for railroad companies. However, rising fuel prices will also be accompanied by an increase in fuel surcharge revenue, which should at least partially offset the impact of higher fuel costs on profits.
Below are the key drivers of CSX's value that present opportunities for upside or downside to the current Trefis price estimate:
- U.S. Rail Carloads of Coal: We currently forecast U.S. Rail Carloads of Coal to increase from 4.1 million in 2016 to 4.3 million by the end of the Trefis forecast period, as we expect the upside for natural gas prices to remain limited beyond 2017.
However, potential steps pertaining to loosening environmental regulation on coal production by the U.S. government could significantly boost coal production in the country. If U.S. rail carloads of coal rise to 5.3 million tons by the end of our forecast period, as opposed to 4.3 million in the base case, it would imply a 4% upside to our price estimate.
- CSX's EBITDA margin: We currently forecast CSX's EBITDA margin to increase from 44% in 2016 to 57% by the end of the Trefis forecast period, primarily driven by productivity initiatives being undertaken by the company. CSX plans to achieve an operating ratio in the mid-60′s over the long term by undertaking productivity improvement initiatives. There could be an downside of roughly 4% to the Trefis price estimate if margin growth as a result of productivity improvement is below expectations and margins improve to only 55% by the end of the Trefis forecast period as opposed to 57% in our base case forecast.
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 20,000 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 Industrial Freight and Intermodal divisions are the most valuable divisions and contribute around half of CSX's total value. The key factors responsible for this are:
Tightening trucking capacity
Declining fleet sizes and inadequate availability of truck drivers have significantly tempered the freight transport capacity of the trucking industry. The Hours-of-Service safety regulation for commercial vehicle drivers has put pressure on trucking capacity by limiting the number of working hours for truck drivers. The tight trucking capacity will lead to high volumes of freight shifting to railroads. As the demand for railroads’ services increase, so will their pricing power.
Growth in the U.S. economy
The U.S. has seen healthy growth in the past few years, driven by growth in sectors such as automotive, industrials, and housing. CSX has benefited from this growth through an increase in carloads for its Industrials, Housing & Construction, and Automotive segments. The IMF forecasts the U.S. output to grow 2.6% in 2016 and 2017, following on from 2.5% in 2015, which indicates that the growth in these sectors is likely to persist. (Link) This should help drive CSX carloads in the coming years.
Strengthening coal market
CSX's coal shipments have risen in the first few months of 2017 as a result of rising demand for the commodity from utilities. An increase in natural gas prices in 2017 is expected to boost the share of coal in U.S. electricity generation. Going forward, favorable policy support from the U.S. government could boost shipments further.
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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