This Railroad Company Is Chugging Along Nicely

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With highways getting increasingly congested worldwide, especially in terms of freight transport, the good old railroad network appears to be becoming an increasingly attractive option to move goods around once again. Some of the companies in the industry are doing a good job of growing earnings as a result of this increased volume. With a fairly low valuation, a nice dividend yield and strong earnings, CSX (NYSE: CSX) in particular looks like a solid choice.

Introducing CSX

CSX operates as a rail-based transportation company, mainly in the eastern United States, with a route network of around 21,000 miles. The stock has a market cap of $23.78 billion and with a beta of 1.44 is slightly more volatile than the overall market. Despite this fact, it is only up around 7% in the last twelve months, lagging behind the broader market rally. On the other hand, it offers a handsome 2.60% dividend yield at a payout ratio of 31%.

Opportunities and Earnings Growth

CSX stands to benefit in a big way from the resurgence of rail transport, and intermodal transport in particular. The company has been investing heavily in its truck-to-rail conversion capabilities, including the opening of new terminals and upgrading its trains to be able to carry more freight. The boom in US oil production especially provides opportunities for growth.

Over the last few years, CSX has been consistently improving its earnings. Managing to turn a profit in 2008 and 2009, annual EPS increased from $0.96 in 2009 to $1.76 in 2012. The company delivered beats throughout 2012, and also kicked off 2013 with a healthy beat, delivering EPS of $0.45 versus a consensus estimate of $0.40. Encouragingly, the last report saw intermodal revenue up 4%, and volume up 3%. The strong performance in this segment is expected to further benefit from favorable pricing and strategic investments.

Industry Peers

While CSX has been doing well, it does face some stiff competition from other railroad transportation companies in the United States. Norfolk Southern (NYSE: NSC) is one of the company’s prime competitors in the East, and one that is also seeing strong growth in the intermodal segment. Yet, earnings growth seems to have stagnated a bit between 2011 and 2012, with annual EPS dropping $0.02. Additionally, the 3-5 year expected growth rate of 11.5% is lower than CSX’ 14.5%.

Kansas City Southern (NYSE: KSU) is another competitor that is benefiting from increased volume, and has been growing earnings very impressively over the last few years. Annual EPS increased from $2.06 in 2010 to $3.34 in 2012, with analysts expecting $4.10 for fiscal 2013. However, this excellent growth comes at a premium, as the stock’s valuation has skyrocketed along with its strong earnings growth.

Valuations and Metrics

CSX is fairly inexpensive at the moment, trading at 12.86 times trailing earnings versus Norfolk Southern’s 13.12 and Kansas City Southern’s daunting 30.52. The operating margin of 30% is more or less on par with the industry, and the return on equity of nearly 21% is good. Moreover, the price-to-sales of 2.02 is lower than that of the competition.

The Bottom Line

Like its competitors, CSX stands to benefit greatly from increased railroad transportation volume, as companies are increasingly choosing this mode of transportation over trucks. While the competition is fierce, the company looks well positioned for growth in the near future. Kansas City Southern appears to be outpacing CSX in terms of growth, but at the moment, this performance comes at a steep premium. As such, I think CSX is the better choice as an investment. 

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