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High Guru Activity Calls for Deeper Analysis

April 09, 2014 | About:

Conditions for railroad operations in the U.S. do not look as good as on the other side of the Great Lakes. While Canadian National (CNI) and Canadian Pacific (CP) have wrestled with a greater demand and adverse environmental conditions — conditions that have sparked a heated debate at Congress — U.S. railroad operators lack the necessary demand to be noticed by the market.

Another characteristic that separates operators in the U.S. from those in Canada is the geographic presence. Both Canadian operators compete along the same routes, but in the U.S., companies are assigned to regions. Hence, CSX (CSX) only operates railways from north to south, between the Mississippi River and the Atlantic Ocean. Most importantly, the firm operates no railway along the Mississippi River, and routes are intended to connect the delta with the ocean and vice versa. Nonetheless, four gurus have taken new positions in the railway operator during the last quarter of 2013. Are they looking for a long-term investment? Should you?

Freighting State Legislation

After nine years of dedicated work resulting in a stronger brand and developing social media capabilities, Vance Meyer, vice president, corporate communications, left CSX on March 30. Gary T. Sease, until then director, corporate communications, has filled the open spot. With respect to the move, Ellen Fitzsimmons, CSX executive vice president of law and public affairs, said, "Gary is a skilled and experienced communications professional and leader who seeks to address the needs and expectations of CSX's many audiences with candor, efficiency and insight." Those qualities will become handy with the ensuing conflict.

CSX has achieved an overall performance level that is respectable, since it holds an unleashed potential for growth during times when railroad transport is willing to make a comeback. Difficulties however, abound. The first challenge to continuing such performance levels is the U.S. government, and more specifically the Surface Transportation Board. According to the company, the state office put forth a plan to review two aspects of its railroad revenue adequacy standards: the methodology for determining railroad revenue adequacy, and its role for judging the reasonableness of rail freight rates.

The reaction at CSX has been unanimous, declaring the changes will create unpredictable traffic flows, reduce high levels of customer service achieved, and diminish the company's incentive to keep investing. Cressie Brown, vice president service design, has even showed examples of how traffic flows could change under the NIT League proposal with one adding 300 miles and three days to an overall movement and another routing more freight trains through an already congested city and potentially affecting passenger and commuter train service.

Is There a Winner in CSX?

Analysts do not see CSX as an interesting investment. Even with Sandford Bernstein boosting the target price to $26 to $28, the figure remains below that of Buckingham Research and Barclays who downgraded the stock’s rating to “Neutral.” Such ratings are all the more relevant when looking back, as a trend of target price boosting and “Buy” ratings of more than three months comes to a sudden end. In other words, governmental intentions have had the unintended effect of placing doubts over the company’s future performance. Hence, the opening of a state-of-the-art intermodal terminal had little effect over market performance.

CSX has focused on network efficiency, volume growth and pricing above rail inflation, and the policies are expected to continue feeding growth. Also, a growing U.S. economy has management projecting higher demand for 90% of its services. Most importantly, the two leading segments for the company, Merchandise and Intermodal, continue to see transport volumes increase. Additional, but slower, higher demand is expected from agricultural shipments. Last, network and terminal capacity expansion continues to advance, while safety nets are simultaneously improved.

Currently trading at 15.5 times its trailing earnings, CSX’s stock carries a 20% discount to the industry average. Additionally, Peter Lynch would recommend purchasing the stock as earnings have dipped below the price. However, before purchasing for a long-term investment it is recommended to wait for the government decision over proposed changes.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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