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Here's Why CSX Looks Like the Railroad Stock to Buy

July 14, 2014 | About:
kcpl

kcpl

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CSX (CSX) did not perform well in 2013, mainly on account of a weak performance during the fourth quarter. Its profit failed to meet the consensus estimate as coal shipments weakened. Consequently, the company observed a considerable decline in its stock prices in more than two years. Moreover, now, the big question that reels in investors' minds is whether they will find any solace going forward.

Positive moves

CSX is confident about its prospects this year as the market conditions are expected to improve. The company is primarily positive about some of the sectors, namely merchandise, industrial, housing, and construction, and expects to see improvements in terms of both volume and margins. Merchandise business had a strong performance last year, which was mainly fueled by an increase in grain and ethanol shipments, and the company hopes to see the same trend this year as well.

CSX has planned various initiatives to improve its performance and bring the company back on track. In this direction, it is upgrading its Murphy-Brown’s Rose Hill feed mill to a 90-car receiver of unit trains. In fact, it has already converted most of its Prestage Farms facility to 90-car units. The main objective behind these enhancements is to load an entire 90-car unit train within 15 hours. These initiatives will help the railroad company to manage its volumes better and also reduce the lead time to customers. Currently, it has a network of 24 feed and export facilities that can receive 90-car trains.

In addition, with the completion of its Gavilon’s elevator project in Mauzy, CSX has now access to 43 elevators. The project was aimed to improve the shipments of its 90-car loads and now as the project is completed it will enable the company to load higher volumes at reduced costs. It has also launched a grain express Load/Unload program for its 90-car unit. The best part of this program is that it offers financial incentives of $75 per car refund to its enrolled customers. This will attract new customer and ultimately boost its sales numbers.

Intermodal and auto strength

CSX also saw strength in its intermodal transportation business, which has been one of the key factors of growth in the past years. The company plans to invest in this sector, citing opportunities worth nine million truck loads. Moreover, with the increasing demand, it will be investing in locomotive and freight cars to meet the requirements.

The company’s automotive business is also doing well with significant growth in light vehicle production. Management expects the same trend to continue this year as well, with substantial growth in its North American light vehicle production. Similarly, growth in its chemical business has also been favorable as the expansion in the domestic oil and gas industry has created a sustainable opportunity for these products.

Overcoming weaknesses

We have seen that the company has been doing well so far, but the same is not true for all its segments. CSX does not seem to be very optimistic about its phosphate and fertilizer products due to high-inventory levels and uncertain commodity pricing. However, CSX has planned to invest $2.3 billion in core infrastructure to strengthen its ailing sectors and revamp growth.

With such an investment, CSX will be able to expand its boundaries considerably and will be better positioned for growth in the future. In this direction, the company has planned to launch a new terminal this year in Montreal. As mentioned, this will expand the capacity of the northwest Ohio international hub.

Conclusion

Going forward, the company expects its domestic coal volume to increase on a year over year basis, but its coal export volume will decline in the first quarter of fiscal 2014. The markets are still recovering and, as a result, the coal volumes are expected to be in the range of 30-million tons. However, the company looks prepared to face the challenges as it tries to offset the competitive pressure with reduced prices.


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