CSX’s Recent Operational Efficiency Makes It a Contender

CSX - CSX

CSX Corp is a premier transportation company based in Florida. It provides services like traditional rail service and the transport of intermodal containers and trailers. The company operates through its various subsidiaries like CSX Transportation, CSX Intermodal Terminals, Total Distribution Services, CSX Technology, etc.

As a leading rail-based transportation supplier CSX Corp. runs 20,000 route miles of track in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec. It serves major markets in the eastern U.S. and has access to over 70 water port terminals along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes, and the St. Lawrence Seaway. The company also has access to Pacific ports through its alliance with western railroads. The CSX network reaches nearly two-thirds of the US population. CSX moves a broad portfolio of products such as chemicals (20%), coal (19%), intermodal (17%), agriculture & food (11%), automotive (11%), forest products (7%), metals & equipment (7%), fertilizers (4%), and minerals (4%) across the country. The company served three primary lines of business: merchandise (41% of volume), coal (14%) and intermodal (45%) in 2018.

Investment Data

Revenue Growth & Market Exposure

CSX’s transportation network serves some of the largest population centres in the nation and the company is in a good position to benefit from nearly two-thirds of Americans living within its service territory. The company’s access to several ocean, river and lake port terminals allows it to meet the dynamic transportation needs of diversified customers in the manufacturing, industrial, automotive, construction, farming, and energy industries. CSX’s intermodal business links customers to railroads via trucks and terminals. As a testimony to CSX’s best-in-class customer service, it successfully completed the roll-out of individualized trip plan performance data for its merchandise and intermodal customers.

CSX has a rich heritage of 190 years. The company is known for its efficient services and safe deliveries. Shippers typically select transportation service providers that offer the most compelling combination of service and price. As a result, CSX has established a large base of sticky customers. The company provides its customers with access to an expansive transportation network that plays a key role in North American commerce. CSX continues to streamline the rail network, increase its organizational efficiency and improve its operating performance over the years. Revenues increased by 7% in the last year.

CSX set new all-time company records for both velocity and dwell achieving significant year-over-year improvements, as well as strong sequential momentum. The combination of these improved metrics helped significantly increase car miles per day and gain fuel efficiencies. The company continues to achieve operational improvements. It continues to invest in the track infrastructure to provide safe and reliable train operations and reduced the full-year train accident rate by 41%.

Freight railroads provide an economical and environmentally efficient means to transport goods over land. CSX is the only U.S. Class I road to operate below one gallon of fuel per thousand GTM, reducing the overall cost and environmental impact. With rising environmental concerns, CSX is better placed to cater to the increasing transportation needs of large industries. CSX Corp. is transforming its operating model to scheduled railroading, which emphasizes optimizing assets, offer better customer service, reduce costs and improve free cash flow generation. The company has a capital expenditure target of $1.6 billion to $1.7 billion for the full year 2019. CSX also reaffirmed a low-single-digit revenue growth outlook for full-year 2019.

Dividends

CSX has returned nearly $4 billion to its shareholders, including approximately $3.4 billion in buybacks and $750 million in dividends. It currently sports an average annual dividend yield of 1.5% and has a very low payout ratio of ~25%. CSX Corp. is a Dividend Achiever. The company last raised its dividend by more than 18% and has grown its payout at the rate of 13% CAGR in the last decade. Earnings have also grown at a rate of 13% CAGR over the last ten years.

Growth in CSX’s core operating cash flow generation including improvements in working capital drove a 9% increase in adjusted free cash flow to $3.5 billion in the last year. Capital investment declined $88 million or 5% YoY. CSX continues to see a pipeline of real estate opportunities and currently expects gains to be approximately $60 million in 2020. The company is targeting a 60% operating ratio by 2020.

CSX Corp. is continuously engaged in improving its asset efficiency. The company achieved an operating ratio of 58.4%, thanks to the adoption of PSR methodology. Adjusted EPS grew by 67% and adjusted free cash flow improved by 88% during the same time. A diverse revenue base further adds to cash flow stability. Ownership of extensive railroads, a huge base of sticky customers and a strict regulatory environment offer a deep moat to the company.

Competition

The railroad industry is highly competitive. CSX’s major competitor is Norfolk Southern Railway, which has operations throughout most of CSX’s territory. The company also competes with other railroads that operate in parts of its territory. CSX is one of the safest railroad companies in North America and continues to undergo increased training and employee safety programs to retain its leadership position in the industry. While there is local competition to worry about, there is also an overall business competition in the railway world with the following six players across North America: CSX, NSC, UNP, KSU, CNI, and CP.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:UNPUNPUnion Pacific Corp.IndustrialsRailroads0.65173.35117.6821.5425.428.050.02242.240.482043.880.163886Tollbooth - UnregulatedYESYESNONOUSA1
NASDAQ:CSXCSXCSX IndustrialsRailroads0.6471.3454.5819.1825.423.720.01461.460.279641.040.102586Tollbooth - UnregulatedYESYESNONOUSA1
NYSE:NSCNSCNorfolk SouthernIndustrialsRailroads0.54192.2149.0323.9525.428.030.01961.960.468243.760.121163Tollbooth - UnregulatedNONONONOUSA1
NYSE:LUVLUVSouthwest Airlines CompanyIndustrialsAirlines0.4130.8918.2277.2725.420.400.00000.000.000040.000.231360Consumable - DiscretionaryNONONONOUSA1
NYSE:KSUKSUKansas City SouthernIndustrialsRailroads0.35171.8516.2129.4125.425.840.00930.930.274041.600.048233Tollbooth - UnregulatedNONONONOUSA1
NASDAQ:AALAALAmerican Airlines Group Inc.IndustrialsAirlines0.3211.125.660.0025.42-8.170.03603.601.000040.400.036022Consumable - DiscretionaryNONONONOUSA1

Bottom Line

CSX Corp. provides services in the movement of critical goods across multiple industries. It is one of the safest, most customer-focused and best operators in the industry. The company is favourably placed to leverage its leading position in the railroad industry and benefit from growing trade and commerce. Its impeccable reputation for safe and sound movement of goods and on-time deliveries have made it an obvious choice for its customers.

CSX is well-positioned to continue to profit from the movement of goods by having established railroads in highly populated areas and with a connection to many ports. Think about it, even if the goods come from the West Coast, they still have to get on one of those railways and pay a toll and since the majority of the population is on the East Coast.

CSX vs Indices

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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