A Look At Our $60 Price Estimate For CSX Corporation

We have updated our price estimate for CSX Corporation (NYSE: CSX) to $60, following its Q1 earnings announcement, which came in above street estimates, led by cost cutting measures. This reflects a +7% change from our previous estimate. The company’s top line didn’t see any change, as gains in Intermodal freight were offset by single digit declines in the Coal and Merchandise segments during Q1. However, the company managed to cut its costs and post a strong 570 basis point jump in its operating margin, led by lower labor costs and other expenses. Accordingly, we estimate the Trefis adjusted EBITDA margin for CSX to grow 135 basis points in 2018 to 46.50%. We continue to believe that the Intermodal and Industrial segments will likely perform well in the near term, due to a rebound in commodities. However, coal will remain sluggish due to a decline in the U.S. production and exports. We have created an interactive dashboard on CSX’s expected performance in 2018. You can adjust the revenue and margin drivers to see the impact on the company’s performance.

Expect Coal Freight To Decline In Low Single Digits

CSX’s Coal freight is dependent on two factors: 1) CSX’s Total Carloads of Coal, and 2) Revenue per Carload of Coal. The company reported a 2% decline in both volumes and pricing for Coal in Q1, and we expect this trend to continue in the near term, given the expected decline of 5% in the U.S. coal production and 17% in exports. In addition, natural gas prices are not seeing any increases, and are expected to be more or less stable as compared to 2017 levels. Lower natural gas prices will likely result in less demand for coal, and thus impact the railroad companies. The company’s management in the recent earnings call conference stated that domestic coal utility may remain under pressure in the near term, while they expect exports to trend better. Accordingly, we have now revised our estimates for coal volume, and pricing to decline in low single digit in 2018.

Expect Industrial Freight To Benefit From A Rebound In Commodities

Looking at Industrial Freight, we expect revenues to grow in mid single digits, primarily due to a rebound in commodities. Oil in particular has been trending higher due to several geo-political concerns. In fact, WTI crude prices are trading much higher at $69, compared to the average of $58 expected for the full year. In addition, production in the U.S. is expected to be 10.7 million b/d in 2018, the highest annual average U.S. crude oil production level ever. With increased drilling activity, the demand for crude oil related shipments will also increase. Among other commodities, steel is expected to see a rebound in supply, as many U.S. players are adding more capacity. Looking at the demand side, global steel demand is expected to grow by 2% in 2018 while that for North America is expected to grow by 3%. These favorable demand-supply dynamics with respect to these commodities will boost segment revenue growth. Accordingly, we forecast mid single digit growth for CSX’s Industrial Freight segment.

We now estimate 2018 revenues to be $11.7 billion, and EPS of $3.15. Our price estimate of $60 for CSX is based on a price to earnings multiple of 19x, which is lower than many estimates. The current market price is more or less in line with our price estimate for the company.

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