With its 21,000 mile rail network and 4000 locomotives across 23 U.S states, CSX Corporation's (NASDAQ:CSX) transportation network services various populations including the District of Columbia and some Canadian provinces. Almost two-thirds of Americans live within CSX's service territory.
The purpose of this article is to estimate the fair value of CSX stock to assist investors in deciding whether the stock is undervalued or overvalued.
According to the Federal Railroad Administration the U.S. freight railroads are private establishments that are responsible for their own improvement and maintenance projects. A major chunk of the revenues of rail networks is used in up-keeping and adding capacity to existing systems. On average, almost 15 to 20 percent of capital expenditures are utilized to augment capability.
Over the next several years the U.S. export growth is expected to outperform import growth. Reviving global demand and increasing competitiveness will support U.S. exports. As per Market Research, it is likely that the country's import bill will be reduced due to the continuation of expanding domestic energy production and this will provide enhancements to freight transport volumes.
Freight is moved by air, water, pipeline, truck and rail. Almost 40% of the freight movement in the U.S. is catered by rail networks.
Source : Federal Railroad Admin.
Looking forward, the rail industry seems positive. Development of the new energy markets, enormous new facility contributions in intermodal, super cyclical retrieval in the auto and housing markets and improvements in rail networks have built economic momentum during 2012-2013 and experts are quite optimistic about the rail industry's future. With the world's lowest rail shipping rates the U.S. rail network increases the attractiveness of this mode of freight movement to shippers everywhere.
The company currently operates 4,000 locomotives and owns ninety seven percent of these locomotives. Eighty seven percent of locomotives are used for freight movement while eight percent are used for switching and the remaining five percent are used as auxiliary units.
CSX Corporation has been outperforming the industry during the last twelve months. Its gross margin of 67.67% for the trailing twelve months is way above the industry score of 16.11%. The operating margin of 29.35% depicts the company's operational efficiency compared to the industry's margin of 9.35%. Along with higher gross margins, the company is successfully fetching higher net profits as well. The net profit margin for the trailing twelve months was recorded at 15.95% and that shows the company's proficient allocation of resources and optimal utilization of strategies.
The efficiency of the company's management is one of the core drivers of its profitability. For the last twelve months, return on assets of 6.24% and return on equity of 20.14% proved the management's proficiency and competency compared to the industry's ROA of 5.26% and ROE of 8.9%.
To fetch and maintain higher profits than the industry is evidence of efficacious business administration and unswerving abilities of management. CSX Corporation is one of those companies who retain the aptitude and potential to withstand higher profit margins for the long term.
Whether it is business profitability or management efficiency the company has been outdoing the industry as a whole for the past five years. The gross margin for past five years grew by 66.78% on average for the company while the industry underwent a growth rate of 15.3%. Growth in CSX's operating margin for the last five years was 27.5% on average while the industry's operating margin growth rate was stationed at 8.6%. The company enjoyed a net profit margin growth rate of 14.43% on average for the last five years while the industry's net margin growth rate was at 5.74%.
One of the reasons why I am optimistic about CSX is the efficiency of its management. Regardless of business or economic qualms the management has outdistanced the industry's efficacy. Over the past five years, on average, a growth of 5.66% in return on assets corroborated management's ability to carry on the business on favorable terms and the 18.37% growth in return on equity is proof of splendid execution of managerial errands.
The company has successfully been shifting profits to the shareholders. The dividend growth rate on average for the past five years was recorded at 24.57% which is much higher than the industry rate of 3.76%. The current dividend yield of 2.13% compared to 1.49% of the industry and five year dividend yield growth rate of 2.09% compared to 1.75% of the industry reflect the superior performance of the stock.
According to Trefis, a major fraction of CSX's stock price, 32%, is derived from industrial freight. Coal freight is the second largest portion with a 22.3% share while intermodal freight and agricultural freight share almost the same percentages and constitute 15% of the stock price.
Considering the available information and making inferences based on the facts and figures provided, I have calculated CSX's fair value using the price multiples based valuation.
As per my estimation, the stock is currently undervalued and has an upside price potential of at least seven percent. Bearing in mind the transportation outlook for the rail industry and the company's durable existing foothold and aptitude for future endeavors my recommendation is buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article