Despite ongoing economic upheavals disrupting demand levels,
) continues to post strong year-over-year growth backed by a
favorable pricing momentum. We remain positive on the company's
growth opportunities, pricing power and operating efficiency. We
believe that CSX Corp. is among the best positioned rails to
benefit from the favorable industry fundamentals. Market
share gains on truck, new business in intermodal, effective cost
controls and higher yield in the non-coal businesses remain primary
catalysts for an earnings upside.
However, stiff competition, increased railroad regulation,
highly unionized labor and uncertain market conditions for some of
its product lines may limit the upside potential of the
Over the past year, CSX has significantly benefited from
positive rail industry pricing and operational improvement that
drove its earnings and margin growth. As a result, the company
expects to deliver earnings per share growth of 20% till 2015 along
with achieving operating ratio target of 65% within 2015. We
expect improving market fundamentals, improved cost control
measures and service levels will aid the company in producing these
strong bottom-line results.
We remain optimistic on accelerated growth in the company's
major segments, namely Intermodal and Merchandize. Despite a
slowing macroeconomic environment, we expect Intermodal to register
double-digit growth on the back of tight truckload capacity.
Further, the Merchandise segment is expected to fuel growth with
higher volumes in phosphates and fertilizers. Industrial shipments
are expected to remain strong driven by growth in Automotive and
Metals products. Oil and gas related growth will aid Metals and
chemicals shipments. The construction sector is expected to improve
driven by recovery in multi-family housing.
Going forward, we expect coal volumes to remain strong with
higher utility coal exports, mostly to Asian and European markets.
Many developing countries are in the process of building
electricity grids that is resulting in more utility coal demand. In
2013, the Energy Information Administration (EIA) projects that
electricity generation from coal will increase 7%, as coal prices
moderate while natural gas prices increase, due to which utility
coal is expected to regain some share. EIA also projects that the
share of coal in the U.S. electricity generation is expected to
increase 40.9% in fiscal 2012 from the estimated 39.3% in fiscal
However, the current market conditions in utility coal also
remain unfavorable for the company in the near term. Given the low
prices of natural gas, declining demand for thermal coal for
electricity generation in the domestic market and higher
stockpiles, lower shipments of utility coal will remain headwinds
for the company in the near term.
Moreover, the company faces significant competition from various
transportation providers including railroads like
Union Pacific Corporation
) along with motor carriers that operate similar routes across its
service area and, to a less significant extent, barges, ships and
pipelines. Further, increased railroad regulation, highly unionized
labor and softness in construction-related markets affecting
Merchandize business may impede growth potential for the company in
Consequently, we maintain our long-term Neutral rating on CSX
Corporation, supported by a Zacks # 3 Rank (Hold).
CSX CORP (CSX): Free Stock Analysis Report
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