CSX to ride to $27

Revenue and profits of railroads will rise from increased activity as the economy recovers.

By Trefis Feb 27, 2012 10:42AM
Cheap natural gas and environmental laws are driving utilities away from coal. As more coal-fired plants shift to natural gas, we expect the drop in demand for coal will affect railroads, such as CSX Corporation (CSX), Norfolk Southern Corporation (NSC), and Union Pacific Corporation (UNP), which transport coal to these utilities.

In its fourth quarter and annual results announced last month, CSX Corporation reported a 3% year-on-year decline in volume of coal transported, even as it realized a 10% growth in annual revenues to $11.74 billion, backed by core pricing gains, greater fuel surcharges and a  slight increase total volumes compared to last year.

We have revised our estimate price for CSX Corporation to $27, which is around 28% above the current market price. We have updated our model with the latest earnings release, made adjustments to the volume of coal moved by U.S. Class I rails and changed the discount rate for the company to account for increased market volatility and uncertainty.

Declines in coal volume may bring down profits

Domestic volumes for coal decreased 10% in the fourth quarter compared to last year quarter, even as the company registered a 13% increase in revenues from coal. Volumes of coal exported increased 31% on a comparable basis.

Lower coal demand for electricity generation was the major reason for decline domestically. In line with the company's projections, we believe that demand for coal might face challenges this year. We think that strong exports, which boosted the coal volumes in 2011, might not aid coal traffic as Australian coal production levels return to normal after severe weather conditions faced last year. Coal freight makes up almost 32% of our valuation price for the stock.

You can also read about the impact of lower coal in our article CSX Worth $34, But Too Dependent on King Coal

CSX Share of US Rail Carloads of Coal

Higher oil prices will boost revenue

Soaring oil prices will contribute to revenue growth for the company in the form of higher fuel surcharges that railroads charge to their customers to recover incremental fuel costs. Increased fuel recovery of $117 million contributed to growth in revenues totaling $2.95 billion in the last quarter and offset the impact of higher costs. We believe the ability of rail carriers to recover fuel costs will benefit them, but the assistance may be limited by their ability shift to burden on their customers without hurting the volumes transported. In addition to this, higher oil prices make rail a more attractive method of transporting goods over trucking.

Growth momentum in the economy

The recovery in the U.S. economy led the railroad to higher profits last year. An increase in economic activity, consumer confidence that boosted consumer spending, demand for motor vehicles and coal exports helped the company realize 1% growth in total volumes moved. We expect that as the U.S. economy slowly recovers and the positive momentum builds up, the revenue and profits of railroads will rise from the increased economic activity.

The company expects expansion in volumes to continue this year as the economy recuperates. In its outlook for the year, the rail carrier is hopeful that categories representing 71% of the volume it carries will fare well in 2012 backed by higher consumer demand, industrial activity, expected agricultural produce and greater highway truck conversions. With its expansion and infrastructure development plans in place, we believe that the company remains poised to gain as the economy recovers. Maersk business has given the right start to the year as it will likely result in expansion of intermodal revenues for the company.

Tags: csxNSCUNP


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
266 rated 2
485 rated 3
660 rated 4
586 rated 5
652 rated 6
640 rated 7
504 rated 8
289 rated 9
159 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.