Can This Company Just Keep Chugging Along?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2013 year begins its roller coaster journey, I would like to pinpoint a transportation giant which dominates the railroads of America, CSX Corporation (NYSE: CSX).
- Solid Revenue Growth: In 2006, CSX reported revenue of $9.57 billion; in 2011, the company announced revenue of $11.74 billion, representing year over year annual growth of 4.17%, this trend of single digit revenue growth is widely anticipated to sustain into the future, with projections placing 2016 revenue at $14.16 billion (this growth has been a result of increasing revenue per carload through all CSX’s business operations)
- Dividend: At the moment CSX pays out quarterly dividends of $0.14, which annualized puts the dividend as yielding 2.67%
- Institutional Vote of Confidence: 66.92% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
- Diversification of Business: CSX possesses a 21,000 mile railroad network, which serves centers in 23 states east of the Mississippi River, and holds a diversified business which transports industrial commodities, coal, agricultural commodities, in addition to several other products; and with this diversified and establish nature comes a certain level of predictability and certainty.
- Reasonable Valuation: Currently, CSX carries a price to earnings ratio of 11.70, a price to book ratio of 2.60, and a price to sales ratio of 1.84, all of which indicate a company trading with a reasonable valuation
- Double Digit Margins: The company holds a net profit margin of 15.52%, representing a strong and profitable company primed for growth.
- Cash & Equivalents: CSX currently possesses about $1.9 billion of cash and cash equivalents on their balance sheet, a major upside to the business.
- Exposure to Coal: In 2011, 26.2% of total revenue was derived from coal freight, an energy source which has been nearly squashed by the Obama administration. According to Murray Energy, regulations from the EPA and a possible carbon tax could lead to the “total destruction of the coal industry by as early as 2030,” a major weakness for CSX’s business
- Debt: At the moment, CSX holds approximately $12 billion of debt on their balance sheets, a major disadvantage to the business as this massive debt load outweighs its pile of cash and cash equivalents.
- Extreme Cyclical Nature: CSX is an incredibly cyclical company, and is very susceptible to any economic slowdown, a major weakness to the business.
- Dividend Growth: Since implementing their dividend program in 1922, CSX has consistently raised their dividend payouts, and this trend is highly expected to continue into the future
- Growth in US Industrial Freight Industry: The company’s main business segment is industrial freight, which makes up 30.3% of total business, and the United States industrial freight market has grown steadily over the past years, going from 3.22 million rail carloads in 2008 to 3.45 million rail carloads presently, and if CSX is able maintain its current market share it should benefit from further growth that is expected in the industry
- Growth in US Agricultural Commodities Freight Industry: CSX’s third-largest business segment is agricultural freight, making up 14.7% of total business, and this market is heavily anticipated to reverse its current downtrend and display growth into the future, which should benefit the company if they are able to maintain their market share
- Growth in US Rail Intermodal Units Industry: 14.4% of CSX’s total business is concentrated in its intermodal freight segment, which is located in an industry which has grown substantially over the past years, from 11.5 million units in 2008 to 212.7 million currently, and any further growth in this industry should highly benefit the company
- Growth in Market Share: An increase in market share in any of the company’s business segments could lead to increased revenue growth and incredible opportunity for the company
- Competition: The railroad transportation industry is incredibly competitive, and the competition to offer the best product for the least amount of money can lead to margin compression.
- Rise in Fuel Prices: Every day CSX utilizes millions of gallons of diesel to run its massive fleet of trains, and any rise in fuel prices could lead to compressed margins for the company.
- Slowdown in Economic Activity: CSX is an extremely cyclical business, and is severely threatened in times of economic slowdown, more so than other businesses because of CSX’s extreme cyclical nature.
Major publicly traded competitors of CSX include Norfolk Southern Corporation (NYSE: NSC), Union Pacific Corporation (NYSE: UNP), Kansas City Southern (NYSE: KSU), and Canadian Pacific Railway Limited (NYSE: CP). Norfolk Southern is valued at $20.66 billion, pays out a dividend yielding 3.06%, and carries a price to earnings ratio of 11.90. Union Pacific is valued at $61.57 billion, pays out a dividend yielding 2.11%, and carries a price to earnings ratio of 16.21. Kansas City is valued at $9.77 billion, pays out a dividend yielding 0.88%, and carries a price to earnings ratio of 25.66. Finally, Canadian Pacific Railway is valued at $18.56 billion, pays out a dividend yielding 1.31%, and carries a price to earnings ratio of 26.42.
The Foolish Bottom Line:
Financially, CSX is extremely solid. The company possesses solid revenue growth, a strong dividend, and a diversified and profitable business producing double digit margins. However, the company possesses a major weakness in its reliance on shipping coal, an energy source which is highly projected to dwindle in the coming years. This issue is of such huge importance because it makes up nearly a quarter of the company’s total business. On the other hand, CSX possesses a growing dividend which should reward shareholders into the future. All in all, while CSX is financially solid, the company’s reliance on coal is just too great, and until the company is able to reduce its exposure to coal, the company will not be worth investing in.
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