CSX: This Railroad Stock Is a Strong Buy

CSX (CSX) announced first quarter ended March 31, 2016 total revenue of $2.62 billion, down 14 percent year-over-year from $3.03 billion during the same period last year.

CSX declared first quarter of 2016 net earnings of $356 million, or $0.37 per share, down 19.5 percent year-over-year from $442 million, or $0.45 per share in first quarter of 2015.

The key railroad corporation reported continued year-over-year decline in both its top and bottom lines primarily driven by the ongoing weaker global commodity demand and pricing environment coupled with a strong US dollar, negatively impacting the company’s key margins and forcing it to keep a tight control on both its core and non-core expenditures.

The disappointing first quarter earnings performance highlights the negative impacts of weaker fuel recovery, mix and volume greatly offsetting the pricing gains.
Top line growth from key customers that failed to meet minimum volume obligations fell $95 million on a year-over-year basis. CSX delivered robust operational performance and delivered solid safety results with notable improvements in efficiency and services. Moreover, CSX witnessed 90 basis points growth in its operating ratio to 73.1% which signifies that a majority of its revenue is utilized in maintaining the company’s daily operations that reduces its profit generation capability.

A closer look  

The macro-economic environment is believed to stay weak in the short-term and over the longer term as well with the US dollar continuing to strengthen, ongoing decline in WTI crude oil prices index, fall in steel and iron production index and the continued weakening of US corn prices in dollars per bushel. Going forward, the complete fiscal year 2016 coal volume is estimated to decline approximately 25% with continuing year-over-year slippage of metallurgical coal benchmark in dollars per ton. The Henry Hub natural gas prices index in dollars per million BTU and Thermal Spot prices index (API2) in dollars per ton are seen to be declining continuously year-over-year and projected to continue this falling trend over a longer period.

CSX is expected to continue to suffer margin losses amid weaker global commodity demand and pricing conditions which should force the company to delay or cancel its expansion plans while maintaining a healthy cash position to support its daily operations profitably and offering attractive shareholder returns.

Impressive strategies  

The key commodities year-over-year volume growth is estimated to continue to remain weak as poor demand trends are believed to persist during the second quarter of 2016. Although weak demand trend is observed in several industry segments including agriculture, construction, industrial, international intermodal and domestic intermodal, but, coal as a commodity has recorded the sharpest year-over-year demand decline over the past few quarters.

However, strong service performance has yielded robust pricing all through the yearly cycle with consistently expanding on-time originations and superior year-over-year growth in same store sales pricing.

CSX’s solid efforts to enhance year-over-year train length is driving significant efficiency savings which is believed to deliver long-term sustainable returns for CSX, assisting the company in quickly and easily overcoming the difficult times while generating enough cash flows for delivering excellent shareholder returns. The complete fiscal year 2016 efficiency savings is quickly approaching a record savings for the company and exceeding approximately $250 million.

The ongoing highly-efficient company operations, attractive pricing and robust services coupled with strategic train length expansion efforts is expected to drive sustainable long-term company growth while delivering attractive shareholder returns.


Overall, the investors are advised to “Buy” equity in CSX Corp. considering the company’s solid near-term and long-term growth prospects with a PEG ratio of 2.65, depicting healthy company growth and somewhat better than the industry’s growth average of 2.05 only. The profit margin of 16.51% seems impressive. However, CSX needs to optimize its debt-burdened balance sheet with significant total debt of $10.54 billion against a weaker total cash position of $1.11 billion only, restricting the company to continue with its daily operations profitably.
Published on Jul 1, 2016
By Subhen Mittra

Copyrighted 2020. Content published with author's permission.

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