CSX Corporation: The Rail Industry Is Benefiting From Reshoring
kojihirano Investment Summary The trend of reshoring manufacturing back to the US is starting to shape and a company like CSX Corporation (NASDAQ: CSX ) can heavily benefit from this as a transportation company that operates a comprehensive rail network in the United States. With its extensive rail system, CSX provides essential freight transportation services across various industries, including agriculture, energy, chemicals, automotive, and intermodal transportation. I think that right now is a great time to get into transportation companies in the US given the most likely high demand they will see from various sources given increased manufacturing in the US. With CSX having a fair multiple (in my opinion) of around 16 right now, it offers plenty more reward than risk buying at the prices. CSX is heavily investing in establishing itself in new regions to grow and solidify both margins and cash flows. CSX is rated a buy from me. Strong Growth Plan As mentioned, CSX is expanding its portfolio rapidly and is targeting 20 new sites, primarily on the eastern side of the US. Besides that, they also have over 500 projects concerning the development of robust pipelines, all in an effort to establish themselves as the primary rail company in the country. Market Position (Investor Presentation) Much of the investment case around the company is benefiting from this growing trend of reshoring manufacturing back to the US, but what has been a tailwind for the company is actually coal shipments. They noted in a recent presentation a 21% YoY increase in coal shipments. The shipments and demand for coal seem to be slowly on the rise , as we can’t quite get rid of the need for it. It’s still a necessary part of our society to generate energy and CSX for example will continue to benefit from its existence in my view. Volume Change (Investor Presentation) Much of the appeal of companies like CSX to be used for shipments is the fact they heavily cut down on the supply chain, they act almost as a sole delivery of goods, as opposed to something needed to be shipped from abroad that changes travel ways several times. If there is a stop in any of those exchanges delays happen and we experience once again what we had in 2020. I am bullish on the rail industry in the US as demand strengthens and CSX is capitalizing on this by growing cash flows and bolstering shareholder value, through raised dividends and continuous buybacks for example. Quarterly Result The last report by the company showed them able to grow at a good rate as they are capitalizing from the volume growth they are experiencing, driven primarily by coal. Revenues reached $3.71 billion for the quarter, a 9% YoY increase. But the pricing gains in Q1 of 2023 helped grow the margins at a good rate, which helped the bottom line outperform the top line and EPS grew 23% YoY. The stabilizing market environment should be a benefit to CSX in my opinion as it will help them streamline their costs further and maintain margins more efficiently. Q1 Highlights (Q1 Report) Looking at the full year for 2023, CSX sees revenues growing in the low single digits. Now I don’t expect them to be seeing revenue growth like a tech company perhaps would. CSX is well established and price hikes aren’t that easy to pass on to customers. Instead, the growth is seen with expanding margins and steadily increasing cash flows which at a large percentage gets passed on to shareholders through dividends and buybacks. CSX is still noting inflationary pressure and that it could be impacting margins. So because of this, I think a disappointment in the margins in coming quarters could be the reason for a multiple compression. 2023 Guidance (Investor Presentation) Just quickly looking at the cash flows for the quarter, they reached $816 million, down from $976 million the year prior. Whilst this decrease doesn’t make the outlook any more optimistic, the primary decrease in cash flows seems to be the additions of properties, which accounted for a negative $443 million in the quarter, up from $331 million in Q1 of 2022. Going into Q2 the year I would like to see an improvement in the cash flows to help make the bullish case for the company even stronger. Risks The most prominent risk facing the company is something they have noted themselves, inflationary pressure. This seems to be driving the lower intermodal revenue the […]
