CSX Corporation Is Fighting to Survive in a Difficult Market

CSX Corporation (CSX) is expected to deliver weak earnings growth for 2016. Poor results this year would follow a historically weak 2015. What's gone wrong?
The higher end of its earnings guidance seems tough to reach in the present global energy pricing environment. Considering the weaker natural gas pricing situation and improved inventory levels which are continuously lowering utility coal demand, sales growth will be harder to come by.

Coal pricing for the quarter did improve a bit, but solid domestic results were offset by weaker volumes for fixed or variable contracts.
The coal pricing gains for the quarter were somewhat balanced by poor export coal pricing compared to the same period last year.

The declining domestic coal demand and weaker export pricing of coal should negatively impact the company’s margins for the quarter putting downward pressure on its top line growth.

Let's dig into each segment to see what's going on   

The volumes of agricultural products, phosphates and fertilizers, food consumer goods declined mainly due to combined effects of reduced ethanol shipments due to over-supply in the eastern ethanol markets, poor worldwide demand, a strong dollar, weaker demand for canned goods due to shifting consumption pattern, and a fall in fresh food shipments owing to drought conditions.

The volume for chemicals grew somewhat due to notable growth in energy-linked markets, where crude oil and LPG growth volumes were slightly balanced by frac sand reductions due to poor drilling activity for natural gas this year.
CSX Corporation Is Fighting to Survive in a Difficult Market
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However, finished vehicle volume expanded with North American vehicle production growth. But, metals volume fell due to strengthening dollar, encouraging greater imports and weaker domestic demand mainly in the energy sector.

The volume for forest products also fell due to lower demand for paper products, mainly printing paper.

The continuously declining global commodity pricing trend is expected to continue in the near future.

Diversification has been tough to implement

CSX is highly focused on diversifying its base of offerings through venturing into new and unexplored markets. This has proven easier in theory than practice.

CSX is believed to contribute to more than 60% of U.S. industrial production, so diversifying away risk is nearly impossible, especially given its assets are fixed into their geographical locations.

Key analysts have forecasted even weaker domestic coal shipments due to extreme climate conditions and weak natural gas pricing in the U.S. With horrid pricing and rising competition due to lower oil/gas prices, it will be tough for CSX to match the historical growth levels that investors have gotten used to.

Difficult conditions, but an attractive valuation

Overall, investors should avoid buying shares of CSX Corporation. However, CSX is attractively compared to its peers, with trailing P/E and forward P/E ratios of 16.6 and 14.7 times respectively, better than the industry’s average P/E of 22.3 times.If you're insistent on maintaining an exposure to the rail industry, CSX is a relatively solid choice.
Published on Oct 6, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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