CSX Corp. (CSX, Financial), the $46.4 billion Jacksonville, Florida-based railroad company, reported impressive business growth figures in the second quarter with 9% year-over-year revenue growth to $5.8 billion and 8.9% profit growth to $872 million (15.03% margin vs. 15.05% a year earlier). Overall expenses also increased by 9.4%.
“We are implementing Precision Scheduled Railroading on an expedited timetable, converting switching operations, balancing the network, streamlining resources and getting more out of our assets.
“Although there still remains a lot to be done, we are confident that these initiatives will drive improved customer service, greater resource efficiency and superior shareholder value.” – E. Hunter Harrison, president and CEO
Ă‚
Valuations
CSX is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 26.6 times vs. the industry median of 17.6 times, a price-book (P/B) ratio of 4 times vs. 1.24 times and a price-sales (P/S) ratio of 4.1 times vs. 1.14 times. CSX also had a trailing dividend yield of 1.43% with 39% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 4 times and 22 times –Â both about 1.4 times higher than previous three-year average valuations.
Total returns
CSX has outperformed the broader Standard & Poor's 500 index in the past five years having generated 19.7% (annualized) total returns vs. the index's 15.08%. So far this year, the railroad company recorded 44.9% total gains vs. the index's 11.7%.
CSX
According to filings, CSX is a leader in freight rail transportation for nearly 190 years from the origins of the Baltimore and Ohio Railroad Co. – the nation’s first common carrier – was chartered in 1827.
Since its founding, numerous railroads have combined with the former Baltimore and Ohio through merger and consolidation to create what CSX is now (1).
CSX provides rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.
CSX’s principal operating subsidiary, CSXT, provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. It has access to over 70 ocean, river and lake port terminals along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway.
CSX’s intermodal business links customers to railroads via trucks and terminals. CSXT also serves thousands of production and distribution facilities through track connections to approximately 240 short-line and regional railroads.
In addition to CSXT, CSX’s subsidiaries include CSX Intermodal Terminals Inc., Total Distribution Services Inc., Transflo Terminal Services Inc., CSX Technology Inc. and other subsidiaries (2).
CSX sources of revenue can be analyzed in 10 segments, including other revenue generators.
Agricultural and Food Products
Revenue in Agricultural and Food Products rose 3.7% year over year to $653 million (11% of total revenue). In the past two years, revenue declined on an average of (-)4%.
Fertilizers
Fertilizer revenue in the first half grew 2.5% year over year to $247 million or 4% of sales. In the past two years, revenue declined on an average of (-)6.9%.
Chemicals
Revenue in the Chemicals business grew 3.5% year over year in the first half to $1.12 billion or 19% of sales. Revenue fell (-)4% on average in the past two years.
Automotive
Revenue in the Automotive business grew 3.3% year over year in the first half to $623 million or 11% of sales. In the past two years, the segment experienced a positive 2.1% growth average.
Metals and Equipment
Revenue in Metals and Equipment grew 4.8% year over year to $368 million or 6% of sales. The segment experienced a (-)7.4% revenue drop on average in the past two years.
Minerals
Revenue in Minerals climbed 10% year over year to $242 million or 4% of sales. Minerals experienced 1.8% revenue growth in the past two years.
Forest Products
Revenue in Forest Products rose 1.3% year over year growth to $386 million or 7% of sales. In the past two years, revenue in Forest Products declined by (-)2.8% on average.
Coal
Revenue in Coal grew 29% year over year to $1.05 billion in the first half or 18% of sales. Coal revenue declined (-)19.8% on average in the past two years.
Intermodal
Intermodal revenue grew 7% year over year to $882 million in the first half or 15% of sales. The segment experienced (-)1.8% revenue decline in the past two years.
Other
Other includes revenue from regional subsidiary railroads, demurrage, revenue for customer volume commitments not met, switching, other incidental charges and adjustments to revenue reserves.
Revenue in CSX’s Other segments grew 30.5% year over year in the first half to $231 million or 4% of sales. In the past two years, revenue declined on an average of (-)4.9%.
Sales and profits
In the past three years, CSX’s revenue declined on an average of (-)2.73%, profit decreased by (-)2.76% and profit margin 15.8%.
Cash, debt and book value
As of June, CSX had $620 million in cash and cash equivalents and $11.83 billion in debt with a debt-equity ratio of 1.02 times vs. 0.9 times the year prior. Overall debt rose by $1.3 billion year over year while equity fell by $24 million.
No blue sky elements such as goodwill and intangibles were observed in CSX's $35.86 billion assets while book value dropped by (-)0.2% year over year to $11.6 billion.
Cash flow
In the first half of 2017, CSX's cash flow from operations declined (-)1.6% year over year to $1.57 billion. Despite the positive profit growth, the company had experienced higher cash outflow in relation to its accounts receivable, income and other taxes payable and other current liabilities.
Capital expenditures were $955 million leaving the company with $611 million compared to $526 million in the year prior. The railroad allocated 1.8 times or $1.1 billion in shareholder dividends and buybacks. The company also raised $525 million in debt net repayments and other activities.
In review, CSX allocated $2.4 billion in share repurchases alone in the past three years having bought back its shares at estimated per share prices of $28.94, $30.93 and $30.41 in fiscal years 2014, 2015 and 2016.
The cash flow summary
In the past three years, CSX allocated $7.4 billion in capital expenditures, raised $1.5 billion in debt (net repayments and other activities), generated $2.35 billion in free cash flow and paid out $4.4 billion in dividends and share repurchases at an average free cash flow ratio of 194%.
Conclusion
There is no doubt that CSX has recovered pretty well in the first half compared to its prior-year operations. All revenue generators delivered as low as 1.3% growth (Forest Products; 7% of sales) to as high as 29.1% (Coal; 18% of sales).
Compared to CSX’s operations in first-half 2016 where it recorded (-)1.3% revenue decline, the nearly bicentennial railroad company registered a significant rise in revenue in the first half this year with 9%. Meanwhile, analysts expect an average of 4.4% revenue growth this fiscal year.
Nonetheless, the company registered higher debt and leveraged balance sheet while having kept significant payouts to its shareholders (194% of free cash flow in the past three years).
Analysts have an average price target of $57.92 per share vs. $51.15 per share at the time of writing. A conservative 1% revenue growth rate be applied multiplied by its three-year P/S average followed by a 20% margin indicated a figure of $26.8 a share.
In summary, CSX is a pass.
Notes
1 –Â Summarized from filings: CSX was incorporated in 1978 under Virginia law. In 1980, the Company completed the merger of the Chessie System and Seaboard Coast Line Industries into CSX. The merger allowed CSX to connect northern population centers and Appalachian coal fields to growing southeastern markets.
Later, CSX acquisition of key portions of Conrail Inc. allowed CSX Transportation Inc. to link the Northeast, including New England and the New York metropolitan area, with Chicago and Midwestern markets as well as the growing areas in the Southeast already served by CSXT.
2 –Â Summarized from filings: CSX Intermodal Terminals owns and operates a system of intermodal terminals, predominantly in the Eastern U.S. and also performs drayage services (the pickup and delivery of intermodal shipments) for certain customers and trucking dispatch operations. TDSI serves the automotive industry with distribution centers and storage locations. Transflo connects nonrail served customers to the many benefits of rail by transferring products from rail to trucks. The biggest Transflo markets are chemicals and agriculture, which includes shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the company.
CSX’s other holdings include CSX Real Property Inc., a subsidiary responsible for the Company’s operating and nonoperating real estate sales, leasing, acquisition and management and development activities. These activities are classified in either operating income or other income – net depending upon the nature of the activity. Results of these activities fluctuate with the timing of real estate transactions
Disclosure: I do not have shares in any of the companies mentioned.
