CSX Long
CSX Corporation, together with its subsidiaries based in Jacksonville, is one of America’s leading transportation suppliers. The company’s rail businesses provide rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers. Overall, the CSX Transportation network encompasses about 20,000 route miles of track in 23 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec. Their transportation network serves some of the largest population centers in the nation. Nearly two-thirds of Americans live within CSX’s service territory.
Now, I personally don’t know anything about rail companies, however, I’m considering that as an advantage as I’m assuming a typical investor also wouldn’t. The reason why I believe this to be an advantage is unlike other companies, there aren’t any people investing in it just for the fun of it. The type of people I assume who have a sizable amount of share in this company are the ones who have a very knowledgeable idea of the company and its strategies and are into it for the long run otherwise if it was just an average investor who just wanted to put his money somewhere without any research they would have most likely chosen a much better-known company such as Apple. Another advantage about these unknown company is the fact that they don’t have any haters trying to short it. Even in a worst case scenario if the company comes out with a bad report, it will mostly just be people who already had their money into the company selling their shares rather than other people trying to short it.
Adding more, I can’t really see how a rail company would expect a bad outlook as they’re in a completely different business sector with different customers. They don’t have the typical customers that a bank or a grocery would have and I assume their customers have no other choice but to use their services. Something else about this sector is that there is very minimal competition in it so they don't have any big rivals taking revenue away from them.
As we’ve seen over the last few months, many companies have lost a big chunk of their value due to the worries that are rising about a recession. This has caused many investors to sell the positions they already own and have a profit on and put it into safer stocks that won’t be affected if there is a recession. One example of this was P&G. They have gained over 20% over the last few months solely because of their recession proof dominance. I believe another great example of this is going to be CSX. In fact, comparing their stock price from the last quarter, it has increased from $27 to $32 which is a good indicator that this is one of those safe stocks investors have decided to invest in. If all the big companies that everyone knows about have dropped in value but a rail road company has been doing better than most of them, it’s safe to assume people who own shares of it are in for the long term.
In fact, I find America going into a recession a big advantage here. Typically, when you picture a poor person, it’s someone who has to take the train to work everyday because they don’t have money to buy a car. I only find the number of these types of people increasing considering the environment we are heading to currently.
I also find winter time to have a positive impact. You already have the typical customers you always had during the summer, however, there are a new set of customers as well now. Due to dangerous road conditions in winters, many people prefer to take the trains due to their safety. At the same time, many people who didn’t have a car but walked to work instead, will now be taking the train because of the weather. So I believe the demand and the number of tickets sold have increased compared to last quarter.
One thing that has been on my mind are is their revenue. While the customers might be increasing, that also mean the number of trains have been increasing which results in a more often maintenance work on the tracks. It’s also important to keep in mind that maintenance costs have been increasing as well which could eat into their revenue. A sign of this can be seen in their forecasted EPS. There is a decrease in the EPS compared to last quarter however, I don’t find this to be an issue. The current EPS estimation is $0.47 which is the second highest estimate they have received, the highest one being last quarter with $0.49. It is also still much higher than the last year’s estimate, which is something most companies are seeing the opposite in. Additionally, this company has missed the estimates only twice since 2018, the last one being in 2021 so a lower estimate gives them the opportunity to beat it by an even higher %.
As I explained earlier, investors are being extra cautious with their positions so seeing a price increase in CSX is a very good indicator that the position they are in right now sets them up for a great future outlook which also translates into a report that assures investors that they are a safe investment.
I believe the main reason why I could be wrong would be their revenue drop. Unlike other companies, trains can’t increase their ticket prices as often or as high as other people so their profit margins end up decreasing. This could also result in CSX not being able to increase their service costs. While the government could fund train companies for their losses, I dont think railway companies will be getting as big of a support. But considering that we could be heading to a recession, the government could be putting extra focus on these types of companies so in case the demand increases, the are in a capacity where they can operate normally. Furthermore, winter weather could have also impacted their revenue as train operations sometimes had to be stopped due to the weather conditions.
Research:
The company should continue to benefit from a shift toward lower-cost transportation alternatives.
Trefis estimates CSX's Q4 2022 net revenues to be around $3.82 billion, reflecting an 11.5% y-o-y growth and slightly above the $3.72 billion consensus estimate.
Higher inflation has resulted in some shippers turning to low-cost alternatives, such as railroads. With rising costs, the company should be able to expand its average revenue per carload
Looking back at Q3, the company reported an 18% rise in revenue to $3.9 billion, led by a solid 18% rise in average revenue per carload, while the total volume of carloads was up 2%
CSX's Q4 2022 earnings per share (EPS) is expected to be $0.52 per Trefis analysis, comfortably above the consensus estimate of $0.46
The company's biggest revenue segments are chemicals, intermodal, and coal. While domestic coal demand is steadily declining, the company benefits from strong pricing and high export demand. While a global recession will damage coal demand, the shift in energy fundamentals, like lasting natural gas shortages in Europe and Asia, will keep a floor under coal demand. Moreover, the long-term decline in coal demand is slow enough to allow the company to diversify. It has done this very successfully over the past few decades.
This is what the company commented on coal during its 3Q22 earnings call on October 20: So optimistic on the production side. There's clearly a need when you look at the utility coal mines are the utilities that we serve, particularly in the South. They have a lot of inventories; they need to replenish and so we anticipate a lot more consistent deliveries over the next year to really replenish those levels and we continue to see the export market very, very strong and a lot of geopolitical risk out there in Europe and other areas where you probably didn't see as much demand a year ago, continue to have a lot of demand.
Unfortunately, railroads (in general) were dealing with high growth in operating expenses. In 3Q22, the operating expenses of CSX grew 25%. This caused operating income to grow by just 10%, despite 18% sales growth.
According to the last report: While there is uncertainty in the global economy, we feel confident in our ability to deliver on this guidance as we look over the remainder of this year. As we mentioned in our earlier remarks, we are pleased with the positive momentum in our service metrics. And we continue our hiring and training efforts to ensure that we have the resources needed to build on these trends and drive improved network fluidity.
furthermore, CSX continues to benefit from demand growth in agriculture, coal, and automotive, as more than 100,000 vehicles are waiting for transportation. This also supports pricing.
Since October, analyst estimates have come down consistently. In October of 2022, 2023 EPS was expected to be $1.99. Now, that number is $1.88. Looking at the chart below, 2023 revenues are now expected to decline by 1%, indicating weak volume growth.
While buybacks are common among Class I railroads, CSX usually takes it to another level as it prioritizes buybacks over dividends. Especially in strong years, the company spends billions on buying back its own shares. Buybacks used to be tax-free. Now they are taxed at 1%, which still makes them a very attractive way to distribute cash to shareholders. However, these distributions are indirect as cash does not end up in shareholders' pockets. Buybacks lower the share count, which increases the value per existing share.
Over the past ten years, only Union Pacific (UNP) was able to buy back more shares than CSX. However, CSX outperformed all peers when it comes to earnings PER SHARE growth, which includes buybacks and its ability to grow organically.
Companies saw that modern supply chains were, in fact, not as resilient as initially expected. The pandemic opened a lot of eyes, which includes awareness of the risks that come when dealing with governments like the one in China. Companies wanted to move supply chains closer to their end-customer. Meanwhile, high energy prices and structural changes in Europe are triggering the same, which is great news for manufacturing in the United States. CSX benefits from that. After all, it is the backbone of manufacturing in the Eastern part of the United States, connecting companies to supply and demand.
On November, this is what CSX commented: I still am a believer that you're seeing more and more activity on the on-shoring side with uncertainty in China, with some of the things that have been created with the Russia conflict, that's going to be more and more of a driver for companies as they look at their supply chain as a competitive advantage, and how can they have the reliability to their customers that others can't deliver.
According to Patrick Doyle, a quant investor: It’s not all sunshine and lollipops at CSX, though. The capital structure has deteriorated fairly significantly over the past few years in my view. Although the cash hoard has expanded by about $220 million, or 10% over the past year, long term debt today is about $1.66 billion higher today than it was this time last year. That’s troublesome in my view, as higher levels of leverage eventually translate into higher levels of risk.
Another great indicator as to how a company’s report is going to look like is seeing if there have been any recent estimate revisions. Taking a look at the revisions that took place during January, Raymond James increased their price target to $36 from $33, Morgan Stanley increased their price target to $24 from $23, and Wells Fargo increased their price target to $32 from $28.
Estimated movement:
Since 2020, the highest this company has dropped or went up was 4%. So based on this, it’s safe to assume we can’t expect any movement above 5%. Another thing the % number comes down to is by how much the manage to beat the estimates. Analysts are expecting the reported EPS to be 0.52, which is much higher thant the estimated 0.47. After also doing my own research, I find this number to be reasonable as it also the same EPS they reported last quarter. This company has a very good history of reporting an EPS that is higher than what it was last quarter, so considering that they also reported an EPS of 0.52 the last quarter, the same EPS for this quarter would make sense as it shows no growth, but also no decrease. The estimated EPS has decreased compared to last quarter so for their reported EPS to not change is a reasonable outcome. This has led me to expect a 3% change considering the revenue and EPS they are reporting, the % they are expected to beat the EPS by, and what their stock price was at the last time they reported a similar number.
Estimate: +3%
Market cap: 65,300,815,123
P/E ratio: 16.56
Report time: Today after market close