CSX Corporation (CSX), a leading rail-based transportation company in the U.S. announced plans to raise its capital investment from $2 billion to $2.2 billion for 2011. The investment will be mostly dedicated toward the purchase of assets, including railcars, to address the growing demand for export coal.
Currently, the global trend in the coal market suggests momentum in U.S. export coal. The ongoing global supply constraints for export coal due to disruptions in Australia, and growing export coal demand in Asian countries for steel production, China and India remain major catalysts in shifting global coal demand toward the U.S. market.
Industry sources suggest that approximately 81 million tons of coal were exported during 2010 and expects the number to exceed 100 million tons this year. We believe CSX remains well positioned to leverage its financial strength and capitalize on the growing export coal market. The company registered a record high level of approximately 11 million tons of export coal in the first quarter and projects the figure to increase to a whopping 40 million tons for the full year. Further, the demand for U.S. thermal coal in the domestic market for power plants will also drive growth, considering that the domestic market consumes approximately 1 billion tons of U.S. coal to generate electricity.
We believe that the increase in capital investment indicates the company’s continued efforts to achieve its earnings growth target of 20% through 2015 on strong volumes, revenue growth as well as operating ratio improvement. Further, the capital plan remains in accordance with the company’s commitment to invest 18% of total revenue in the business till 2015 to support growth goals.
The company’s financial strength enables it to reward shareholders incrementally. Along with the increase in capital plan, the company’s board of directors approved the dividend payment of 12 cents per share, payable on September 15, to shareholders of record on August 31.
However, we remain cautious on the stock due to competitive pressure from railroads like Norfolk Southern Corp. (NSC), underlying unfavorable trends in housing and utility coal markets as well as surging fuel prices (up 42% in the first quarter on a year-over-year basis).
Consequently, we maintain our long-term Neutral rating on CSX Corporation supported by a Zacks #3 (Hold) Rank.
CSX CORP (CSX): Free Stock Analysis Report
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