Despite the coal worries, CSX Corporation (CSX) foresees record growth in the ongoing first quarter driven by growth in its key segment — Intermodal and Merchandize. The company has recently projected that the upcoming first quarter results will exceed all previous first quarter records on the growing demand for rail freight transportation along with favorable shipments of some of the merchandize product lines.
Despite a slowing macroeconomic environment, Intermodal is expected to do well on the back of truckload conversion, new contract wins and strategic investments in infrastructural development such as Northwest Ohio Intermodal Facility and the National Gateway initiative, that will not only foster capacity, but also enhance service capabilities. Additionally, the company’s recent deal (effective January 1, 2012) with Denmark-based Maersk Line, the leading ocean carrier will also benefit in terms of rail-cargo operations by shifting the majority of intermodal business (transporting containerized cargo and truck trailers) at APMT Container Terminal located in Portsmouth, Virginia.
Earlier, Maersk collaborated with Norfolk Southern Corp. for its entire intermodal business at this terminal. Further, the Merchandise segment is expected to fuel growth, with greater volumes in agricultural and industrial sectors, particularly in automotive.
The company expects these positive factors to largely compensate for utility coal volume that has already decelerated approximately 25-30% in the ongoing quarter due to warmer winter weather, resulting in reduced utility consumption and lower natural gas prices. Last year, utility coal registered more than a 30% decline but the company transported approximately 40 million tons of export coal offsetting the utility slump.
The company also believes that solid coal exports will remain favorable, as demand for U.S. coal continues to grow in Europe, South America and Asia. Coal prices will also be aided by the tighter global coal supply market. However, the company announced a reduction in freight rates of approximately 12% in metallurgical coal export, following competitive pricing strategies in the global market.
We expect the company to remain focused on growth with increased profitability across most of its product lines. Higher profitability will further support investments to meet growing demand in the transportation sector. Additionally, we expect the company to focus on better pricing to allow inflation and rising fuel cost recovery.
However, we remain cautious about the stock due to the company’s capital intensive nature and unionized workforce, increased competition as well as increased railroad regulation. The company’s primary rail competitor is Norfolk Southern Corp. (NSC), which operates mostly across the length and breath of CSXCorp.’s territory.
CSX Corp. currently retains our long-term Neutral recommendation, supported by the Zacks #3 Rank (Hold).
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