The growing demand for rail freight transportation over truck has driven significant investment in rail infrastructural by CSX Corp. (CSX”>CSX). Following its investments of approximately $2 billion last year, the company will investment approximately $1.4 through its customers in rail infrastructural development. The timeline for the investments remain unspecified.
CSX customers, involving entities from manufacturing, consumer goods, energy and other industries will invest in expanding tracks and other facilities on the tracks connecting to the CSX network including over 240 short lines and other regional railroads in approximately 17 states. These investments will not only create more jobs and drive economic growth in these regions but will also generate over $230 million in annual revenue.
Given the periodic rises in fuel price, shippers have been turning their attention toward more cost efficient intermodal freight transportation. As a result, rail intermodal has gained considerable market share against truck and continues to project an upward growth trajectory for the future. Another factor influencing shippers’ choice of transport includes connectivity to marine ports.
Given CSX Corp.’s capacity to move a ton of fright to a distance of approximately 500 miles on a gallon of fuel and connect 70 shipping hubs including ocean, lake and river ports, it is expected to remain a clear choice for customers opting for rail freight transport over peers like NorfolkSouthern (NSC”>NSC) and Union Pacific Corporation (UNP”>UNP).
Over the past year, the company has significantly improved its market share by improving its network infrastructure. Backed by heavy investment, the company has launched the National Gateway, a multi-year public-private infrastructure initiative, aimed at the efficiency of the freight network between the Mid-Atlantic ports and the Midwest.
Upon completion, the National Gateway is expected to reduce truck traffic and increase intermodal capacity on key corridors without increasing the number of trains. We expect this to improve the efficiency and profitability of the company. CSX Corp. has already launched a key part of this project, the Northwest Ohio Intermodal Terminal in early 2011. Total project costs are approximately $850 million, of which CSX expects to contribute approximately $575 million and the rest will be paid by state authorities.
Additionally, CSX has entered into a deal with Florida state regulators to deploy a computerized rail operation called SunRail. According to the contract, CSX will sell a 61-mile rail corridor to the State of Florida and in exchange receive exclusive rights to operate on the SunRail track. The new system is expected to start operations in 2014.
Going forward, CSX plan to invest $500 million received from sale proceeds of the deal in the development of Florida rail infrastructure. On a long-term basis, CSX Corp. projects rail investments to be around 18% of revenue so as to drive substantial improvements in intermodal facility and service metrics.
We maintain our long-term Neutral rating on CSX Corporation, supported by a Zacks Rank #3 (Hold).
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