All Aboard For CSX Rail Tale

8/16/2010


  Recent Price
$53
  Dividend
$0.96
  Yield

1.8%

  P/E Ratio
16
  Shares (millions)
386
  Long-Term Debt as % of Capital
46%
  52-Week Price Range
$62.00 - $40.67

Investing in railroad giant CSX ($53; CSX) requires some faith in the economic recovery. CSX transports materials used by manufacturers, steel mills, and construction companies. Higher industrial activity, in turn, boosts demand for electricity from utilities powered by coal that also travels on CSX’s tracks.

Waves of consolidation over the past century have left four railroads in control of more than 88% of U.S. rail business. Hatched from a 1980 merger, CSX owns the largest rail network east of the Mississippi River, 21,000 miles of track that stretch into 23 states and two Canadian provinces.

CSX is rebounding from a 20% sales decline last year. Revenue advanced 16% in the first half of 2010 and seems poised to accelerate in the next two quarters. Operating profit margins have widened in each of the last four quarters. CSX is a Buy and Long-Term Buy.              

Back on the growth track

CSX groups its freight in three principal categories: merchandise (55% of six-month revenue), coal (30%), and intermodal (12%).

In the six months ended June, merchandise revenue increased 20% on a 13% volume gain. A rise in vehicle production accounts for much of that growth, but sales increased in nearly every category, from chemicals to fertilizer to metals.

Coal started the year weak but gained momentum in the June quarter, lifted by higher volume and pricing. Through six months, coal revenue increased 12% despite 4% lower volume.

Intermodal cargo uses multiple modes of transportation — such as rail, ship, and truck. Sales jumped 13% on 16% higher volumes in the six-month period.

Outlook clears

In recent years, rising fuel prices have made railroad transport an attractive alternative to trucking, though rail service tends to be slower and less flexible. CSX is working to convert truck traffic along the East Coast to rail containers, which would help clients bypass congested highways.

CSX sees a modest U.S. economic recovery in the second half of 2010. With inventories lingering below target levels for many industries, manufacturers will likely continue to boost production. Optimism in the coal business stems from an improving outlook for utilities.

Near-term concerns center on coal exports, which account for about 5% of revenue, after management described softness toward the end of the quarter in China. Another potential problem is a rise in health-care expenses for CSX’s mostly unionized labor force.       

Conclusion

Earnings estimates for CSX have risen steadily over the last three months. The consensus calls for 2010 earnings of $3.85 per share, which represents 34% growth on 16% higher revenue. The stock, up 10% this year, trades at 16 times trailing earnings, cheaper than its largest competitors. An annual report for CSX Corp. can be obtained at 500 Water St., Jacksonville, FL 32202; (904) 359-3200; www.csx.com.

CSX
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '10 $1.07 vs. $0.71 + 22% $62.00 -

$48.00

21 - 16
Mar '10 0.78 vs. 0.62 + 11% 52.83 - 42.05 19 - 15
Dec '09 0.77 vs. 0.89 - 13% 50.80 - 40.67 17 - 14
Sep '09 0.74 vs.

0.94

- 23% 48.85 - 30.25 15 - 10
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $9.04 $2.87 $0.88 $50.80
-
$20.70 18 - 7
2008 $11.26 $3.52 $0.77 70.70
-
30.01 20 - 9
2007 $10.03 $2.73 $0.54 51.88
-
33.50 19 - 12
2006 $9.57 $2.22 $0.33 38.30
-
24.29 17 - 11
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
93 86 58 83 77 94 71

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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