Continued Cautious Outlook on CSX - Analyst Blog

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Despite ongoing economic upheavals disrupting demand levels, CSX Corporation ( CSX ) 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 company.

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 2012.

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 Norfolk Southern ( NSC ) and Union Pacific Corporation ( UNP ) 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 the future.

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
 
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
 
UNION PAC CORP (UNP): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CSX , EIA , NSC , UNP

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