CSX Corporation Appears To Be Fairly Valued At The Current Market Price

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Trefis
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CSX
CSX

CSX Corporation’s (NYSE: CSX)  stock price has been on a strong run with over 30% gains year-to-date. This can be attributed to improved efficiency, and lower operating ratio, among other factors. However, the stock price seems to be fairly valued at the current market price. This note details Trefis’ forecasts for the full year 2019. You can view our interactive dashboard analysisWhat Is The Share Price Estimate For CSX Corporation Based On Expected 2019 Earnings? ~ for more details on the expected performance of the company. In addition, you can see more of our data for industrial companies here.

What Are The Key Sources of CSX Corporation’s Revenue, And How Have They Trended In The Recent Quarters?

  • CSX Corporation generates its revenues primarily from various commodities freight, clubbed under three key segments ~ Merchandise, Coal, and Intermodal.
  • Merchandise segment revenues of $7.5 billion in 2018 accounted for over 60% of the company’s total revenues. It includes revenues from the shipment of merchandise commodities, including agriculture, metals, paper, chemicals, and automotive related goods.
  • Coal segment revenues of $2.3 billion in 2018 contributed a little under 20% to the company’s top line.
  • Intermodal revenues of $1.9 billion in 2018 accounted for over 15% of the company’s total revenues. Intermodal refers to the shipment of containers that can be moved from one form of transport to another.
  • Total Revenues for CSX have largely trended higher over recent quarters, growing from $2.9 billion in Q4 2017 to $3.0 billion in Q1 2019. The growth can primarily be attributed to the capacity constraints in the trucking industry, which benefited railroad companies at large.

How Does The Revenue Growth of CSX Corporation Compare To Its Peers?

  • CSX Corporation’s average revenue growth of 1.1% over the past 5 quarters has more or less been similar to its peers.
  • Norfolk Southern’s revenues have grown at an average of 1.3% from $2.67 billion in Q4 2017 to $2.84 billion in Q1 2019.
  • Union Pacific’s revenues have grown at an average of 1.0% from $5.45 billion in Q4 2017 to $5.72 billion in Q1 2019.
CSX Corporation’s top line will likely grow in mid-single-digits to $12.8 billion in 2019. This is slightly above the consensus estimate of $12.6 billion.
  • Merchandise revenues grew 6% in 2018, and will likely grow 4% in 2019, led by a slight improvement in volume as well as average revenue per carload. The U.S. construction sector is forecast to grow in mid-single-digits over the next three years. This should result in higher shipments of metals, construction products, plastics, and industrial chemicals. The company’s improved service levels have led to growth in the recent past, and this trend will likely continue in the near term. However, fuel surcharge could impact the average revenue growth, given that crude is expected to average at $65 a barrel in 2019, as compared to $71 in 2018.
  • Coal revenues grew 7% in 2018 led by strong exports. However, we expect the growth to moderate in 2019 to 5.1%. This can be attributed to ongoing trade tensions and its impact on exports, while domestic coal demand continues to fall. Coal consumption is estimated to be 603 million short tons (mst) in 2019, marking the lowest level over the past several years.
  • Intermodal revenues of $1.9 billion in 2018 reflected 7% growth y-o-y, and the growth will likely moderate to 5% in 2019 with segment revenues of $2.0 billion. The growth over the past few quarters was primarily led by capacity constraints in the trucking industry. While the trucking situation remains similar in 2019, CSX in particular will see slower growth, as it focuses on rationalization of intermodal lanes.

How Much Can CSX Corporation’s Earnings Grow Based On The Expected Revenue Trends Above?

  • CSX Corporation’s full year 2019 earnings will likely be $4.36 per share, reflecting a 14% growth over the prior year. This is slightly below the average consensus estimate of $4.38.
  • Earnings growth can be attributed to higher revenues, lower share count, and expected growth in margins, as the company remains focused on reducing its operating ratio.
  • Operating ratio fell from 63.7% in Q1 2018 to 59.5% in Q1 2019.
  • The company announced a new share repurchase program of $5 billion in January this year. The company’s diluted share count has declined from 948 million in 2016 to 861 million in 2018, and could fall to 815 million in 2019, thereby aiding the overall earnings growth.

What Is CSX Corporation’s Share Price Estimate Based On the Above?

  •  CSX Corporation’s fair value for its share price is estimated to be $82 based on a 19x forward price to earnings multiple, and earnings of $4.36 per share.
  • The multiple for CSX is slightly above the 18x for Norfolk Southern and Union Pacific. This can be attributed to the company’s focus on increased efficiency, and it is on track to trim 1,100 miles of its lines.

 

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