Will CSX Stock Continue Its Recovery from the Pandemic?

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Before the COVID-19 pandemic brought the U.S. economy almost to a halt, CSX Corp. (NYSE: CSX) was expecting 2020 to be a great year, a senior executive said Wednesday. But now that shipments of various goods have been drastically cut, the company is using the situation to increase its efficiency and customer service.

“We’re right-sizing and doing everything we can to adjust to the new normal,” said Mark Wallace, executive vice president of sales and marketing. “And while I don’t think any of us expected this pandemic to happen, nothing at CSX has changed our strategy, our focus.”

Wallace was speaking at the annual Wolfe Research Transportation and Industrials Conference, which was held in webinar format instead of as an in-person meeting. He said the rail freight transportation company was committed to providing the most efficient transportation services with the best customer service.

CSX is using video-conferencing services to stay in touch with its customers.

Finding Efficiencies That Can Be Sustained

He noted that while the number of CSX trains running has decreased during the coronavirus outbreak, the length of the trains have remained the same. In cases where a manufacturer previously had an entire train devoted to moving its products, the fewer number of rail cars from that customer have been combined with the rail cars of other customers.

This has been the case with the automotive industry, he said. And as the Big Three carmakers begin to restart their assembly lines, CSX will adjust. The automakers are resuming production in phases. 

“GM this week announced that they expect to be back to full production by the middle of June,” Wallace said. “The other two are sort of taking a wait-and-see approach. I think we’re doing the same.”

The return of auto production provides two types of traffic for CSX, he said, because trains are needed to deliver components and parts to the assembly plants, in addition to delivering completed cars.

‘We’re Treading Along the Bottom’

He said he hoped that CSX would be back to pre-COVID levels of volume perhaps by the end of the summer. “My crystal ball is only as good as everyone else’s,” Wallace said. “But certainly we’re hopeful on that front.”

If an automaker reaches the point where it needs a full train to carry its products, CSX will accommodate that. But if lower production rates don’t require that, CSX will combine cars on one train.

Intermodal freight transportation may be slower in its comeback, Wallace said, because international shipping is challenged. After the country went on lockdown, a lot of inventory built up in warehouses. That will have to “bleed through” before international shipping ramps up. “Clearly, I think for the foreseeable future, I think international is going to be a little soft,” he said.

“I think we’re treading along the bottom,” Wallace said. “And we’ll see what happens going forward as the economy starts to reopen and hopefully stay open and the consumer gets back on its feet and starts buying things and going to the malls again. But I think that’s going to take some time.”

Shipments of coal for domestic utilities are also down, he noted.

So overall, Wallace expects revenue to be down more than volume in the second quarter.

In the first quarter, the rail operator based in Jacksonville, Florida, reported that net income dipped by 8% to $770 million. But the company said its operating ratio of 58.7% was an industry record best for the first quarter. A railroad’s operating ratio is total expenses divided by revenue. Expenses dropped by 7% in the first quarter, a higher rate than the 5% dip in revenue.

Like much of the stock market, CSX shares plunged in mid-March. The share price climbed out of the trough in April after reporting its first-quarter earnings results. The stock price was $65.96 at the close on Tuesday and was up about 4.5% at midday Wednesday. The 52-week high is $80.62; the low is $46.81.

Shares of Norfolk Southern and Union Pacific Corp. (NYSE: UNP) were also trading up on Wednesday.

Wall Street appears to have some confidence in CSX, which is the second-ranked rail freight company, behind Norfolk Southern. Analysts’ price target for CSX is $67.52, with a high estimate of $76.00. The current consensus rating is Buy after quite a few analysts boosted the price target in recent weeks.

Competing With Trucking Industry

Asked how CSX was doing against Norfolk Southern Corp. (NYSE: NSC), Wallace said, “We’re going to continue to compete very, very hard, whether it’s with Norfolk Southern or whether it’s with the highway.” But he said the real competition was with trucking.

“There are billions and billions of dollars that are available out there that are moving by truck that should be moving by rail,” he said. “Rail used to own this freight.”

He said CSX would go after a higher share of the business by encouraging current customers to use trucking less, by persuading  former rail customers to come back and by showing new customers what rail can do for them.

Earlier this month, the CSX board approved a $0.26 per share quarterly dividend on the company’s common stock. The dividend is payable June 15.

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