On Nov 18, 2013 we maintained our Neutral recommendation on rail transport service provider CSX Corporation (CSX). We remain encouraged by the company’s growth in Merchandize and Intermodal segments. However, a subdued coal business, fierce competition and regulatory issues remain causes of concern. This Florida-based company holds a Zacks Rank #3 (Hold).
We believe favorable rail industry pricing and operational improvement will drive CSX’s revenues and earnings going forward. The company aims to bring down its operating ratio to the high 60s range by 2015 and to mid-60s in the long term through volume expansion, cost control and pricing gains.
Within the Merchandize segment, we remain encouraged by the company’s agricultural, automotive, chemical and construction sector. Improved crop yields will boost the company’s agricultural business, while automotive shipment will remain stable owing to increased vehicle production. In terms of chemical product shipment, the company is expected to gain from the emerging domestic oil and gas industry, while steady recovery of the U.S. economy will support growth in the housing sector.
The ongoing highway-to-rail intermodal conversions and customer wins remain the main driver for the company’s intermodal segment and could deliver growth much higher than the rate of broader economy. Further the company will benefit from the movement of intermodal traffic in double stacking lane, which is expected to grow even further owing to investments in network.
Declining Coal volumes remains the primary concern for CSX. We expect coal revenues to remain affected by transition in the energy markets. Consequently, the company’s volume outlook on domestic coal remains bleak with an anticipated decline of 5% to 10% in 2013. Even weaker demand of U.S metallurgical coal continues to weigh on the export coal business.
Stiff competition from various transportation providers including railroads and motor carriers along with regulatory issues remain other headwinds for the company.
Other stocks that are worth considering within this sector are Norfolk Southern Corp. (NSC), Arkansas Best Corporation (ABFS) and Covenant Transportation Group Inc. (CVTI). All these stocks currently hold a Zacks Rank #2 (Buy).