CSX Stock Has Plenty of Upside
For railway companies, the track ahead looks clearer than at any other time in recent memory. But it’s a track full of railcars, because business in the sector is recovering. Since the start of 2016, CSX Corporation (NASDAQ:CSX) stock, in particular, has dropped 4.9%. Most of that loss occurred in the first weeks of the year.
There is no question that the lower shipment volumes cast a shadow over CSX’s first-quarter revenue and earnings, which were released yesterday. The company reported earnings in line with expectations.
CSX stock, however, had already accounted for the potential downside. CSX stock sank in January and only started to recover by mid-February, bouncing back some 16% from the lows seen last January.
However, CSX’s difficulties over the past year and a half were beyond its control. CSX, like other companies in the sector, suffered from a combination of a strong dollar, the enduring commodity price slump, and an overall global trade reduction. (Source: “Railroad Operator CSX Keeps Chugging Along,” The Wall Street Journal, April 12, 2016.)
CSX, in particular, has been weighed down by the slumping U.S. coal market. The company has typically extracted about 20% of its revenue from coal operations. (Source: “Why Should Investors Consider CSX’s 1Q16 Earnings Preview?” Yahoo! Finance, April 7, 2016.)
Of course, one of the major energy trends is the shift away from coal to natural gas. The rail industry, on average, earns 15% of revenue from coal. (Source: The Wall Street Journal, op cit.)
Recently, CSX undertook a series of measures to address the coal woes. To start, the company has started to shift to the side of the market that is growing: intermodal transport. Intermodal transport relies on consumer retail demand, which performed better than other areas in 2015 and has been doing well so far in 2016.
You don’t need to be a railway expert to understand “intermodal.” Fancy as the term may sound, it simply refers to the shipping of those metal containers that people often see lined up and stacked on top of one another at shipyards and manufacturing facilities. Ships, trains, and trucks transport these containers.
The market suggests intermodal transport will increase sharply in North America over the next few years. In fact, the New York and New Jersey port authorities have already started to improve port facilities to compete with Los Angeles for intermodal transport supremacy.
CSX’s competition shows the extent to which the transportation and logistics sector expects intermodals to grow and railway links are an important part of the sector’s growth strategy. The better railways are connected to the Midwest, the faster and better the service at cargo terminals will be, taking advantage of a new generation of mega-ships that are docking at U.S. ports. (Source: “Today’s Top Supply Chain and Logistics News From WSJ,” The Wall Street Journal, April 12, 2016.)
Another bullish prospect for CSX is that the Canadian Pacific Railway Limited (USA) (NYSE:CP), while less than optimistic due to regulatory concerns regarding over-consolidation in the railway sector, has the hots for CSX. Last January, CPR bid $20.0 billion for CSX. (Source: “CP Rail discussed merger potential with CSX while pursuing Norfolk Southern,” CBC, March 3, 2016.)
Canadian Pacific Railway remains hungry for a merger and it shows that the transportation sector leaders expect growth and CSX is an attractive company.
At its current price, CSX stock is starting to look like a bargain. Canadian Pacific will likely insist on trying to secure a merger, perhaps when the market improves to the point that regulators become more euphoric, said Lee Klaskow, an analyst at Bloomberg Intelligence. (Source: “Canadian Pacific Railway drops attempt to merge with Norfolk Southern,” Ottawa Citizen, April 10, 2016.)