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Summary

  • CSX's performance this year has been sluggish due to a weak earnings report in January.
  • But CSX is optimistic and it is expanding its capacity to make the business more efficient and profitable.
  • CSX's intermodal business has been going strong, and it is making more investments to make it even better.
  • CSX is cheaper than the industry on the earnings multiple, giving investors an opportunity to buy it at a good price.

Railroad company CSX's (NYSE:CSX) performance has been patchy in 2013. One of the reasons behind its sluggish performance this year was a weak fourth-quarter earnings report that was released in mid-January. CSX had missed profit estimates due to weak coal shipments, and its shares slipped the most in more than two years. However, with CSX's first-quarter earnings up next week, will there be any relief for investors? Let's try and find out.

Positive expectations

CSX expects positive and favorable conditions in most of its markets this year, driven by the merchandise, industrial, housing, and construction sectors in terms of volume and margins. The merchandise sector, which includes the agriculture sector as well, had witnessed significant growth in volumes last year, and the same trend is expected to continue this year as well. Increases in grain and ethanol shipments have boosted the merchandise segment so far, and a similar trend is expected going forward.

Expanding capacity

In addition, CSX is upgrading Murphy-Brown's Rose Hill feed mill to a 90-car receiver of unit trains, and has already converted most of its Prestage Farms facility to 90-car units. These upgrades will help CSX to better manage volumes and reduce lead times to customers. CSX now has a total of 24 feed and export facilities located on its network or a connecting short line that can receive 90-car trains. The primary aim of these facilities is to load an entire 90-car unit train within 15 hours.

In addition, CSX recently completed the construction of Gavilon's elevator in Mauzy to improve shipments of its 90-car loads. CSX now has access to 43 elevators that will assist in loading 90-car trains. This move will certainly help the company in loading up higher volumes and reduce costs. CSX has also launched a Grain Express Load/Unload program for its 90-car unit that offers financial incentives of $75 per car refund to its enrolled customers.

This initiative will certainly bring in more customers and increase its customer base. However, the outlook for its phosphate and fertilizer products in terms of volumes remains neutral due to high inventory levels and uncertain commodity pricing. But, on the whole, CSX plans to invest $2.3 billion in core infrastructure to make the most of the different opportunities that could come its way.

Intermodal prospects

CSX's intermodal transportation has been a key growth driver so far. Driven by highway-to-rail (H2R) conversions and a significant growth in its existing customer base and service product enhancements, intermodal has done exceedingly well. Going forward, CSX plans to make strategic investments in both terminals and networks, as the company anticipates an estimated 9 million truckload opportunity. CSX is also investing in locomotive and freight cars so as to meet commercial demand.

CSX will launch a new terminal this year in Montreal, thereby expanding the capacity of the northwest Ohio international hub that is a part of the H2R initiative to enhance service reliability. These moves should produce better results for the company, as they will support growth and pricing in the long run.

Mix of positives and negatives

However, CSX expects that its coal export volume will decline in the first quarter of fiscal 2014, while domestic coal volume is expected to grow year over year. The company estimates coal volumes in the mid-30 million ton range this year, which shows soft global market conditions, primarily in the thermal market. However, CSX is planning to keep lower rail pricing for coal to maintain its competitiveness in this segment.

On the other hand, CSX's automotive business is doing well, as the company noticed significant growth in light vehicle production. CSX anticipates robust growth in North America light vehicle production in the current year as well, which should continue driving demand from this segment. The company also expects favorable growth in chemicals, as the expansion in the domestic oil and gas industry has created a sustainable opportunity for these products.

Delivering value

CSX had paid a dividend of $0.59 per share in 2013, that was up 9% in comparison to the previous year. The company expects to pay a dividend in the range of 30% to 35% of trailing twelve months' earnings, and it will review the amount annually after the first quarter. CSX had also bought back $353 million worth of shares last year, and is on track to complete its current $1 billion authorization by the beginning of the second quarter of 2015. CSX has returned heavy amounts of cash to shareholders through both dividends and share repurchases, and this is a great reason why you should consider the stock.

Conclusion

CSX is cheap when compared to the rest of the railroad industry. Its P/E ratio of 15.5 is quite low, compared to the industry average P/E ratio of almost 20, and its dividend yield of 2.10% is also quite solid. Also, as we saw, CSX returns a good amount of cash to shareholders through buybacks as well. Combining all this with the positive trends that CSX expects in its business this year could make for a good long-term bet.

As far as its performance this year is concerned, improvements in intermodal and capacity expansion should help CSX get its business back on track, making it a stock worth considering for your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Can CSX Come Out Of Its Slump Next Week?