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Why We're Raising Our Price Estimate For CSX To $36

CSX's stock price shot up in the wake of the U.S. presidential elections held in November of last year. President-elect Trump's pro-business policies are expected to boost economic growth in the U.S., which is likely to translate into higher commodity rail shipments, as well. Apart from a general improvement in commodity rail shipments, the shipments of commodities such as metals, petroleum-related shipments, and coal, which registered sharp declines in 2016, could get a boost as well from this year onward. This has prompted us to revise our forecasts for CSX, translating into a new price estimate for the company.

Improved Business Environment

Rail shipments of coal, metals, and petroleum-related commodities witnessed considerable declines in 2016. U.S. rail shipments of coal fell roughly 20% in 2016 as a result of weakness in demand for coal from utilities, with CSX registering a similar decline in shipments of the commodity. Weakness in natural gas prices accelerated the shift towards natural gas based electricity generation in the U.S. Though natural gas based generation is likely to remain the preferred mode of electricity generation for thermal power plants in the U.S., two developments could arrest the sharp decline in rail shipments of coal seen over the past couple of years. The first pertains to government policy, with President-elect Trump vowing to revitalize the fortunes of the U.S. coal industry by lowering prohibitive environmental regulations on coal mining. In addition to the impact of this development on the policy front, higher gas prices in 2017 are likely to reduce the competitive disadvantage of coal vis-a-vis natural gas as a fuel for electricity generation. As per the EIA, natural gas prices are likely to average $3.27 per MMBTU in 2017, around 30% higher than in 2016. Keeping these developments in mind, we have factored in a higher demand outlook for coal in our forecasts. Our new forecast for U.S. rail coal shipments envisages 12% higher shipments by 2023, the end of our forecast period, as compared to our previous forecast.

Apart from an improved business environment for coal, CSX's metal and petroleum-related shipments are likely to move along a more favorable trajectory from 2017 onward, as well. The domestic steel industry had been adversely impacted by competition from cheap steel imports over the past couple of years. With the imposition of antidumping duties during the course of 2016 on steel imports from a number of countries, including major steel exporters such as China and South Korea, business prospects have improved considerably for the domestic steel industry. Moreover, President-elect Trump's plans for a $1 trillion overhaul of domestic infrastructure is likely to boost the demand for steel in the U.S. going forward.

In addition to the improvement in business conditions for steel, higher oil prices in the wake of an OPEC production cut towards the end of 2016 is expected to translate into an increase in drilling activity in 2017. This will positively impact rail shipments of crude oil and related commodities. In light of the improved business outlook for metals and crude oil, we have revised our forecast for CSX's Industrial Freight segment, which aggregates these commodity groups.

In addition to the changes to our shipment forecasts, we have also suitably modified our pricing and margin forecasts for CSX, reflecting the improvement in the company's business environment. This has translated into our new $36 price estimate for CSX , which is a reflection of the company's improved prospects.

Have more questions about CSX? See the links below.

  • What Is CSX's Revenue And EBITDA Breakdown?
  • What Is CSX's Fundamental Value Based On 2015 Results?
  • By What Percentage Did CSX's Revenue & EBITDA Grow In The Last 5 Years?
  • How Has CSX's Revenue Composition Changed Over The Last 5 Years?
  • By What Percentage Can CSX's Revenue & EBITDA Grow In The Next 3 Years?
  • How Will CSX's Revenue Composition Change By 2020?
  • What Would Be The Impact Of A 100 Basis Points Increase In CSX's Share Of U.S. Rail Intermodal Shipments?
  • CSX: A Look Back At The Year 2015
  • CSX's Q1 2016 Earnings Preview: Decline In Shipment Volumes And Fuel Surcharge Revenue To Negatively Impact Results

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for CSX

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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 Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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