Transportation

CSX Stock May Benefit From the Greater Need for Shipping

Douglas A. McIntyre

Ironically, the destruction that the spread of coronavirus has brought to the economy has created the need to move even more things by rail, truck and air. Transportation services have become the backbone of the economy more than ever.

The shares of CSX Corp. (NYSE: CSX) should outperform the stock market. It is in one of the few industries that may make it out of the current catastrophe nearly unscathed.

The CSX Stock This Year

CSX shares have slightly underperformed the S&P 500 so far this year. That is not because freight transportation is out of favor. CSX carries a heavy debt load, one that could hamper its growth. Such burdens tend to be unpopular during a recession.

Last year, CSX posted the worst performance among the U.S. railroad stocks. Of the four U.S.-based, independent freight haulers, all but CSX performed better than the S&P 500 in 2019.

Norfolk Southern Corp. (NYSE: NSC) stock added just over 30% last year, Union Pacific Corp. (NYSE: UNP) added 34.3% and Kansas City Southern (NYSE: KSU) gained a whopping 62%. CSX posted an annual gain of just under 17.7%, well short of the S&P 500’s gain of around 29% and the Dow Jones Transportation index’s 19% gain.

A number of large cap companies have cut their dividends. The CSX payout appears safe. It carries a yield of 2.8% ($1.04). CSX actually increased its dividend for 2020 to $0.24 from $0.26 a quarter.

What Do the Earnings Look Like?

In the fourth quarter of 2019, CSX beat Wall Street expectations for earnings. However, this was because of lower than expected expenses. Revenue was less than the consensus forecast.

CSX posted revenue of $2.9 billion in the fourth quarter, down 8% from the year-ago period. Net income was pegged at $771 million, which was 9% lower year over year.

The forecast for 2020 was relatively strong. Yet, it was made before the coronavirus outbreak. Revenue would be flat year over year, management predicted.

CSX said it anticipates a 59% operating ratio. Capital spending is expected to be between $1.6 billion and $1.7 billion.

Revenue has been relatively flat over recent years. For 2019, the total was $12.0 billion. For 2018, the number was $12.3 billion. In the prior two years, it was $11.4 billion and $11.1 billion, respectively.

What Does CSX Ship? What Could It Ship?

Some of the cores of the rail services shipping businesses were hammered last year.

Total rail traffic was down 5.0% in 2019 and intermodal traffic was down 5.1%. Except for chemicals and oil, shipping by rail has fallen off a cliff.

Coal shipments continue declining, 16.5% lower for the year to date and down 26.8% from the same week a year ago. Since 2009, coal shipments by rail had dropped from nearly 7 million U.S. carloads annually to just over 4 million in 2018.

Crude oil hit a peak of around 500,000 cars in 2014 and had dropped by half in 2018. Crude oil was the only commodity to show an increase in carloads in 2019, up 12.2% year over year.

The wildcard for CSX may be the shipment of crude. While demand has softened, supply has soared. This raises the question of whether crude will be stored or moved to refineries.

Will International Trade Pick Up?

Container shipping from China to the U.S. west coast was low before the coronavirus outbreak. Will it pick up enough in the rest of the year to overcome what appears to be a disastrous first quarter?

Investors long ago raised their bets that the spread of the coronavirus would damage exports from China. The collapse of Chinese factory activity means that this business will not return to normal fairly soon.

Domestic Traffic May Make the Difference

Among the major wildcards for CSX is the level of goods shipped around the United States. The demand for food via a relatively small number of locations owned by huge companies will concentrate shipping areas. Retailers like Walmart and Kroger have added employees to keep up with demand.

Amazon’s massive delivery network is also overburdened. It says it intends to add 100,000 jobs. Many of the items Amazon sells have to be moved from manufacturer or supplier to its huge warehouse operations, and then from warehouse to delivery center. While much of this goes by truck, some long-haul deliveries will need to be done by rail.

What CSX Does Now

CSX is based in Jacksonville, Florida. It calls itself one of the nation’s leading transportation suppliers. CSX offers both traditional rail service and the transport of intermodal containers and trailers. In essence, the company moves trucks by rail.

The CSX network covers close to 21,000 route miles of track in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec. Its transportation network serves some of the largest population centers in the nation. “Nearly two-thirds of Americans live within CSX’s service territory,” the company claims.

CSX also owns a great deal of land adjacent to its tracks. It sells and leases some of this for additional revenue. The company has an entire division named CSX Real Estate.

According to the company:

CSX Corporation is the parent company of several direct and indirect wholly-owned subsidiaries, including: CSX Intermodal Terminals, Inc.; CSX Real Property, Inc.; CSX Technology, Inc.; CSX Transportation, Inc.; Total Distribution Services, Inc. and TRANSFLO Corporation. Each subsidiary is a separate and distinct company.

Rails Won’t Go Away, at Least Not Soon

One of CSX’s advantages is that it has what business school professors call a “wide moat.” In essence, the cost to buy land, build track and buy engines and cars would cost tens of billions of dollars. While quarterly results will fluctuate based now on the spread of the coronavirus, the railroad won’t go away.