Buy the Drop in CSX

CSX (CSX) didn’t put up a strong performance last quarter, but there are a few bright spots that the company’s investors should not ignore. Let’s take a look at the various positives that could help CSX improve going forward.

Highway to rail conversions will drive intermodal growth for CSX

The intermodal segment is a bright spot for CSX. Last quarter, its intermodal volumes increased 6% year-over-year, on the top of a 4% increase in the second quarter of 2015. In fact, the company has seen a rise of approximately 15% in domestic volumes for its intermodal business this year on the back of an increase in highway-to-rail conversion.

This is not surprising as so far this year, intermodal volumes have increased about 5% as compared to 3.9% last year.

This is due to increasing demand for intermodal that is expected to grow in the range of 5% to 6% this year. In fact, the domestic volume for intermodal is forecasted to grow in the band of 6 to 7% by the end of this year. In fact, the report expects total units to grow 700,000 to 800,000 this year to over 17 million units transported this year, which is slightly better than 16.3 million units transported last year.

In addition, the increased investments and infrastructure in the rail network should accelerate highway to rail conversion. As per the same report, the railroad companies are spending over $20 billion in rail networks this year. In fact, BNSF itself has made more than $6 billion investment in its network this year. These improved investments and better infrastructure should lead to better intermodal growth in the country in the coming years.


CSX Corp continues to make progress on the operational efficiency. It has lowered its operating expenses by a significant manner and has improved its operating ratio. Also, it is reducing its workforce in order to mitigate the softness in the coal market.  These improvements should enable the company to deliver handsome returns to its investors and shareholders this year.

Moreover, the stock is cheap at the current price. It has trailing P/E of 13.58 and forward P/E multiple of 13.06 that indicates a lot of earnings potential in the coming five years. The analysts expect its earnings to grow at CAGR of 6.45% for the next five years. Its balance sheet carries total cash of $966 million and has total debt of $10.11 billion. It has operating cash flow of $3.55 billion and free cash flow of $384.50 million for the trailing twelve months.

Published on Nov 4, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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