CSX on track for higher margins
As demand for coal, autos and lumber increases, this well-run rail company can add cars to each train without increasing labor or fuel costs.
There's lots of dispute out there about whether margins have peaked. I know our own Doug Kass has argued mightily that the great margin expansion is over.
CSX is one of the best-run companies in America. The margins went from 25% to 29% last year. That's an incredible acceleration from previous years.
Yet there's Ward again talking about how margins have nowhere to go but up. He ticked off a bunch of factors: newer hubs that cure bottlenecks, including a brand-new operation in Northwest Ohio; more coal exports, which means many more train cars moving coal to the ports than the year before; and further efficiencies when it comes to intermodal traffic.
You could argue that it's all well and good but that the company was poorly run before so the margins have tons of room for expansion. But that's simply not the case. The company has been well-run for years. It's just that with the breakdown of the road infrastructure in the U.S., there's a huge migration from trucks to trains.
Plus, the more business, the more cars there are to pull -- at the same exact labor cost and fuel cost (remember, it has a fuel pass-through). So if you add 25 cars to a 150-car train, the margins just explode. And a locomotive can pull 200 cars, so as business comes back and the demand for coal keeps rising in China and India, you can only imagine how much the margins can go up.
The great thing about this whole margin expansion story? Lumber and autos had always been among the top businesses for this railroad. Autos are way down and coming back, and housing is nowhere. Can't wait to see how much margins go up when those two come roaring back.
At the time of publication, Cramer had no positions in stocks mentioned.
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