Here’s Why We Are Bullish On CSX Corp.

by Trefis Team
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The year 2017 was not a great one for the US-based railroad company, CSX Corporation (NASDAQ:CSX). Though the year started on a high note with the the appointment of E. Hunter Harrison, a railroad industry veteran, as the Chief Executive Officer (CEO), it became difficult for the company to cope with his new and different ways of operating. As a result, the railroad company’s operational performance dropped due to technical slippages, leading to a loss of market share. Further, the year ended on a sad note with the demise of the newly appointed CEO, which left the company’s investors wary of its future prospects.

However, we believe that while Harrison’s departure is a strong setback for CSX, the changing dynamics of the US coal and metal shipments due to Pres. Trump’s favorable policies and recovery in the commodity markets is likely to augment the company’s performance in the coming years.  Currently, we have a price estimate of $55 per share for the company, which is lower than its market price. We will revisit our model in the coming month to better reflect the company’s full year 2017 results and guidance for 2018.

See Our Complete Analysis For CSX Corporation Here

CEO Demise : A Temporary Setback

With the sudden death of CEO Harrison, the investors have been anxious about CSX’s future prospects and its ability to emerge from the ongoing troubles. To add to this, the departure of two of the top executives in the last quarter has left the company with a relatively new leadership, raising further doubts on its ability to implement Harrison’s PSR model to transform itself into a leading railroad company.

However, just a few days prior to leaving for his medical leave his last week, Harrison had named James Foote as an interim CEO for CSX in his absence. With Harrison’s death, Foote has been appointed as the President and CEO of the company. Foote has roughly 40 years of experience in the railroad industry and had assisted Harrison in the turn around of Canadian National Railway a few years back. He appears confident about the role entrusted upon him and aims to remain focused and follow the business plan laid down by the late Hunter Harrison. In addition to this, CSX appointed Edmond Harris as the Executive Vice President of Operations earlier this week. Harris also has 40 years of experience in the railroad industry in an operating capacity, including nearly two decades at the Illinois Central and Canadian National, where he worked closely with Hunter Harrison.

Since Harrison’s successor and newly appointed operations head have worked in close association with Harrison in the past, we figure they are well-equipped to see the company through these difficult times. Consequently, we believe that the company is fully aware of the rising concerns over its ability to emerge from the current situation, and is taking all possible measures to get back on track to achieve new heights at least in the near future.

Recovery In Coal Shipments To Boost Top-line

With the increased awareness about climate change and its implications, the preference for cleaner and safer sources of energy has magnified. As a result, most of the countries are shifting from coal-based economies to gas-based economies, which had led to a sharp drop in coal shipments worldwide. However, with the election of Donald Trump as the US President, this trend seems to be reversing. Since the time the Trump administration has announced its plans to pull back from the Paris Agreement, the coal shipments in the country have gone up drastically. The US coal shipments stood at 4.42 million carloads at the beginning of 2018, almost 8% higher compared to the same period of last year ((Weekly US Rail Traffic, Association of American Railroads)).

Consequently, railroad companies, such as CSX Corp., who derive a significant portion of their revenue from coal shipments, have largely benefited from this move. For instance, CSX’s revenue had been declining at 6.5% on an average between 2014 and 2016. However, for the first nine months of 2017, the company’s top-line has expanded by 6.4% on a year-on-year basis. Similarly, the company’s profitability has also improved  by roughly 6% in the first three quarters of 2017, as opposed to falling by almost 13% between 2015 and 2016. Now, assuming that the government’s current stance on the climate change issue remains unchanged, we expect US coal shipments to continue to rise in the coming quarters, further boosting the company’s top-line as well as bottom-line in the near term.

Auto Sales Could Prove To Be A Downside

Contrary to the coal markets, the automobile industry has not been doing so well. Auto sales have declined sharply through 2017, as the demand for light vehicles has slowed down, despite large discounts being offered by manufacturers to clear their previous inventories. The most prominent factor for this drop is the low replacement rate. In other words, the pace at which cars or trucks are being purchased is not the same as the pace at which they are being replaced. Hence, there has been a void in the demand for these vehicles, which is visible from the decline in their sales year-to-date.

For 2017, the US light vehicle sales forecast stands at 17 million units, which almost 3% lower than the record rate of 17.5 million units in 2016. Further, this trend is expected to continue in the coming years unless some corrective measures are taken by the manufacturers. Thus, we expect CSX to witness weakness in the auto shipments in the next few months. That said, the damages caused by the recent hurricanes in the US could provide some short-term opportunities for the industry and CSX.

Based on the discussion above, we believe that despite a setback in the form of Hunter Harrison’s demise, CSX is well positioned to benefit from the recovery in the US coal shipments and general economy, which is likely to drive its value going forward.

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