We are currently maintaining our long-term Neutral rating on CSX Corporation (CSX), supported by a Zacks #3 Rank (Hold) based on solid growth across all segments, strong cost-control measures and improvements in operating ratio. However, stiff competition, increased railroad regulation and highly unionized labor may limit the upside potential for the company.
The company’s Coal segment remains a key growth factor with strong exports in metallurgical coal on the back of improving global demand and flood conditions in Australia. Utility coal is also in demand owing to growth in electricity generation and industrial requirements.
Further, the Intermodal segment will see demand from new market and pricing gains in both, international and domestic lines. Additionally, tighter Truckload capacity will also bode well for growth in this segment.
Operating leverage remains a significant driver to bottom-line results. Given solid growth across all segments and efficient cost control measures last year, we expect CSX Corp. to achieve operating ratios in high 60s in 2011 that will, in turn, lead to the 65% operating ratio target by 2015.
CSX Corp. continues to invest in its network to further enhance safety and improve service and reliability for its customers. The company has launched “National Gateway,” a multi-year public-private infrastructure initiative, which will make the freight network between the Mid-Atlantic ports and the Midwest more efficient.
The company expects to deliver double-digit earnings per share growth on strong volumes, revenue growth as well as improving operating ratios. Tightening transportation capacity in the truckload market bodes well for continued price improvement as the year progress.
However, CSX Corp. faces intense competition from various transportation providers including railroads like Union Pacific Corporation (UNP) and Norfolk Southern Corp. (NSC) along with motor carriers that operate similar routes across its service area.
Additionally, new rules or regulations of various regulatory agencies, including the Surface Transportation Board, Federal Railroad Administration as well as other state and federal regulatory agencies could increase the company’s operating costs or reduce operational efficiencies.
Further, majority of the company’s employees are represented by labor unions and are covered by collective bargaining agreements. In the event of non-negotiable terms and conditions, the company remains exposed to contingencies like strikes by affected workers, loss of business and increased operating costs as a result of higher wages or benefits paid to union members.
CSX CORP (CSX): Free Stock Analysis Report
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