Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March 2020 helped the markets stage a strong recovery. Q1 2021 marked the beginning of the vaccination programs by various governments, resulting in the global economic rebound, which bode well for CSX's transportation business.
Overall, 2020 marked a year of sales and earnings decline for railroad companies. The coronavirus crisis had a significant impact on transportation demand in 2020, due to an overall decline in manufacturing, lower consumer demand, lower oil prices impacting production and transportation of oil and related products, as well as lower natural gas prices resulting in lower demand for coal. Given the tensions between the U.S. and China on trade, exports were also hit.
The company's top line expanded a good 28% y-o-y to $3.8 billion, driven by growth in all segments. Coal freight revenues were up a stellar 54%, intermodal up 18%, and merchandise freight revenues were up 10% during the quarter. Looking at the bottom line, EPS grew 4% (y-o-y) to $0.52.
Below are the key drivers of CSX's value that present opportunities for upside or downside to the current Trefis price estimate:
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 36,000 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 four major business segments: Coal Freight; Merchandise Freight (which includes chemicals, automotive, agriculture, and others), Intermodal Freight (freight which can be switched from train to another mode of transport like ships), and Trucking & Others, which include revenue from trucking business and 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 Merchandise Freight is the most valuable division, and it contributes around 65% of CSX's total value. The key factors responsible for this are:
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 increases, so will their pricing power.
The U.S. has seen healthy growth in the past before the pandemic, 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.
However, given the Covid-19 pandemic in 2020, economic growth has taken a severe hit. Now that a significant portion of the U.S. population is fully vaccinated for Covid-19, the economic growth is picking up pace. After nearly a 10% GDP growth in 2021, the U.S. economy is expected to grow by another 3% in 2022. This will bode well for CSX's business.
CSX's coal shipments rose in 2017, as a result of rising demand for the commodity from utilities. An increase in natural gas prices in 2017 boosted the share of coal in U.S. electricity generation. Coal benefited from higher exports in 2018. However, coal shipments remained sluggish in 2019 and 2020. Natural gas prices remained high for the better part of 2021, and this resulted in an increase in demand for coal. In the medium to long run, favorable policy support from the U.S. government could boost shipments from the recent lows.