CSX Corporation Will Likely See Steady Growth In The Near Term Led By Volume And Pricing Gains Across Segments

by Trefis Team
CSX Corporation
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CSX Corporation (NYSE: CSX) recently posted a better than expected Q3 performance with a 14% top line growth and over 100% surge in the earnings, led by continued cost cutting measures, along with better pricing across its segments. The company’s three segments, Intermodal, Coal, and Merchandise all saw double digit growth. Looking forward, we expect this trend to continue in Q4 as well. Coal will likely benefit from the continued growth in export shipments, while Intermodal continues to benefit from capacity constraints in the trucking industry. Merchandise will likely see steady growth in construction related commodities, given an expected uptick in the construction, along with agriculture & food products, which should benefit from higher exports. The company has also revised its full-year 2018 guidance, and it now expects revenues to grow in mid-to-high single digits. We have created an interactive dashboard ~ A Quick Snapshot of CSX Corporation’s Q3 Performance And Trefis Estimates For The Full Year 2018. You can adjust the revenue and margin drivers to see the impact on the company’s earnings, and price estimate.

Expect Intermodal Revenues To Grow In Mid-High Single Digits

CSX’s Intermodal segment has seen volume gains of late, and we expect this trend to continue in the near term. This can be attributed to continued driver shortage amid full implementation of the ELD mandate, which has put capacity constraints in the trucking industry, and manufacturers are looking for alternative means of transport. The company also intends to invest more into intermodal terminals, and announced major initiatives at its Northwest Ohio intermodal terminal. Looking at the EBITDA margins, we forecast strong growth for the full year, as the company continues to cut its costs, and improve its operating ratio. Note that the company saw a significant improvement in operating ratio from over 68% in Q3 2017 to under 59% in Q3 2018.

Coal And Merchandise Freight Will Likely See Mid-Single Digit Growth

Coal freight is seeing strong pick up in export volume, given the rise in global benchmark coal prices. CSX’s export coal volume grew 27% in the first nine months of 2018. The overall U.S. coal exports are on track to achieve the highest level since 2012. However, domestic coal volume continues to decline given the trends in  consumption. As such, we forecast only a mid-single digit growth in coal freight revenues for CSX, led by both pricing and volume gains. Looking at Merchandise freight, we forecast mid-single digit growth in segment revenues, primarily led by chemicals, metals, and forest products. We forecast a growth in construction related shipments in the near term. In fact, the U.S. construction sector is forecast to grow in mid-single digits over the next three years, according to a research report. This growth will be led by both residential and non-residential construction.

Overall, CSX’s Q3 earnings were better than the estimates, with continued cost cutting measures aiding the bottom line. We believe that all three segments should do well in the near term, led by both volume and pricing gains. In fact, average revenue per carload was higher for all the segments in Q3, partly driven by higher fuel surcharges. Oil has been trending higher in 2018, and this has translated into higher surcharge revenue for railroad companies. We expect this trend to continue in the near term, as oil prices are expected to remain much higher, when compared to the 2017 average. We expect the company to post earnings of around $3.60 for the full year 2018. We use a TTM price to earnings multiple of around 22x, to arrive at our price estimate of $80 for CSX Corporation, which is a 10% premium to the current market price.


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