Our rating on CSX Corp. (NYSE: CSX) is BUY. Over the past 48 months, CSX has experienced dramatic changes in the executive suite.
The beta on CSX shares is 114.
The shares fell 4% on January 22 after the company reported adjusted 4Q EPS that rose 5% and topped analyst expectations. Revenue of $2.8 billion. Volume rose 4%, while pricing was down 6%. The operating ratio of 57.0% improved by 300 basis points from the prior year’s results, as operating income increased 5%. Adjusted diluted EPS was $1.04, topping the Street consensus of $1.00.
CSX typically provides an outlook to investors with a focus on revenue and operating costs. For 2021, management expects CSX to grow volumes faster than the prevailing GDP growth rate. Management expects merchandise volumes should to industrial production growth as truck volumes are converted off the highway and onto CSX. Intermodal volumes are expected to grow even faster than merchandise as the business continues to benefit from the ongoing inventory restocking and a tight truck market. And following an extremely challenging year, management expects the coal business to begin recovering from 2020 trough levels.
EARNINGS & GROWTH ANALYSIS
Merchandise (66% of 4Q revenue), Intermodal (17%), and Coal (13%). The Merchandise segment transports materials such as food and agricultural goods, fertilizers, chemicals, metals, automotive products, minerals and forest products. Ships export coal to deepwater port facilities. The Intermodal segment combines the efficiency of rail transportation with the short-haul flexibility of trucks.
In the Merchandise segment, 4Q revenue was flat (compared to a 7% decrease in 3Q) as was volume. Volume trends mixed by categories, with strength in Metals and Equipment and Agriculture offset by weakness in Minerals and Automotive. Based on global economic conditions, we expect to see volume trends for Merchandise improve modestly in 1H21. In Intermodal, sales were up 6% as businesses replenished inventories. Volume rose 11%, while pricing was down 4%. Management had recently made strategic changes in this business, deviating from a hub-and-spoke system and focusing more on logistics, such as train length, speed and idle time.
Coal segment revenue declined 18% in 4Q, reflecting a 9% decline in volume and a 10% decrease in pricing. We look for another double-digit sales decline in the Coal segment in 2021, compared to a 33% decline in 2020, an 8% decline in 2019 and 7% growth in 2018.
Former CEO Hunter Harrison was legendary in the industry for his Precision Scheduled Railroading model, which sharply reduced costs at other railroads. In the latest quarter, CSX’s operating ratio was 57.0%, a year-over-year improvement of 300 basis points. Management noted that fuel efficiency improved 5% year-over-year in 4Q, and that locomotive efficiency improved 6% year-over-year.
FINANCIAL STRENGTH & DIVIDEND
Total debt was $16.7 billion, or 56% of total capital. Free cash flow before dividends was $2.6 billion in 2020.
CSX pays a dividend. In February 2020, management raised the quarterly payout by 8% to $0.26 per share. The company also buys back stock. After 3Q20, CSX added $5 billion to the $1.1 billion.
MANAGEMENT & RISKS
In recent years, CSX has seen major changes in the executive suite. The drama began on January 18, 2017, when an activist investor and a legendary railroad executive acquired a 4% stake in the company and began pushing for changes. The legendary executive was Hunter Harrison, the former CEO of both Canadian Pacific (CP: BUY) and Canadian National Railroad (CNI: HOLD). During his CEO stints at those companies, he averaged total shareholder returns of approximately 335% by deploying his Precision Scheduled Railroading process.
Mr. Harrison became CEO of CSX on March 6, 2017, and the activist investor, Paul Hilal of Mantle Ridge, joined the board of directors. In addition, CSX agreed to add three other new board members.
Mr. Harrison’s Precision Scheduled Railroading focuses on seven factors: minimizing car dwell time in yards; minimizing car classifications; using multiple traffic outlets; running general-purpose trains; balancing train movements by direction; minimizing power requirements; and striving for steady workflow.
Mr. Harrison unexpectedly passed away in December 2017. The CSX board appointed James M. Foote as president and CEO on December 22, 2017. Mr. Foote, who had served as acting CEO when Mr. Harrison went on medical leave, was also appointed to the CSX board. CEO Foote had worked with Mr. Harrison for 10 years and had extensive experience with the Precision Scheduled Railroading process.
Investors in CSX shares face numerous risks.