Despite disturbances to demand levels from the ongoing economic upheaval, CSX Corp. (CSX) continues to post strong year-over-year growth backed by a favorable pricing momentum.
We remain encouraged by the company’s segment performance and look forward to accelerated growth, particularly in Intermodal, export coal and strong volumes of phosphates and fertilizers shipments. We believe CSX will deliver volume growth above GDP levels, in parallel with pricing above inflation, in a sound economic backdrop.
Over the last quarters, CSX has significantly benefited from positive rail industry pricing and operational improvement that drove earnings and margin growth. As a result, the company expects to deliver earnings per share growth of 20% until 2015 along with achieving operating ratio targets in the high 60s in 2011 and long-term target of 65% within 2015.
We expect improving market fundamentals, improved cost control measures and service levels to aid the company in producing these strong bottom-line results.
We remain optimistic on accelerated growth in the company’s major segments, namely Intermodal and Merchandise. Despite a slowing macroeconomic environment, we expect Intermodal to register double-digit growth on the back of tight truckload capacity.
Further, the Merchandise segment is expected to fuel growth with higher volumes in phosphates and fertilizers. Going forward, Coal exports will remain favorable as demand for U.S. coal continues to grow in Europe, South America and Asia.
CSX Corp. continues to invest in expanding network and terminal capacity, and enhancing safety, service and reliability for its customers. The company entered into a deal with Florida state regulators to deploy a computerized rail operation called SunRail. The new system is expected to start operations in 2014, and CSX plans to invest $500 million from the sale proceeds of the deal in the development of Florida rail infrastructure.
However, the company faces significant competition from various transportation providers including railroads like NorfolkSouthern (NSC) and Union Pacific Corporation (UNP) along with motor carriers that operate similar routes across its service area and, to a less significant extent, barges, ships and pipelines. Further, increased railroad regulation, highly unionized labor and softness in construction-related markets affecting Merchandize business may impede growth potential for the company in the future.
The present volatilities in the fuel market are also expected to create a cost headwind of approximately $15 million to $20 million in the current year. Additionally, we believe the weakness in construction-related markets will continue to persist during this year and hinder forest products’ growth.
Going forward, most of the company’s employees are represented by labor unions and are covered by collective bargaining agreements. If CSX Corp. is unable to negotiate acceptable agreements, it could result in strikes by the affected workers, loss of business and increased operating costs as a result of higher wages or benefits paid to union members.
Consequently, we maintain our long-term Neutral rating on CSX Corp., supported by a Zacks #3 Rank (Hold).
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