With The Declining Trend In Coal, Is CSX Still A Buy?

Apr.16.14 | About: CSX Corporation (CSX)


Coal revenue is down ~21.95% over the past couple of years.

Is Chemical shipping and Housing / Construction enough to make up for the loss in Coal shipping?

With the decline in Coal, how are CSX's fundamentals holding up?

Over the past year, CSX Corporation's (NYSE:CSX) stock price has had a decent run. Over the past twelve months, the stock increased from ~$24.00 to the current price of $28.01. As this has been an good run, this poses the question, at this point in the market, is CSX still a buy?

Chart sourced by (Finviz)

About CSX

CSX Corporation operates as a transportation supplier. It provides rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.

As CSX's network is positioned to reach nearly two-thirds of the U.S. population, which accounts for the majority of the nation's consumption of goods. Through this network, CSX transports a diverse portfolio of commodities and products to meet the country's needs.

Sourced by [CSX]

In the evaluation below, we will be able to see how CSX has fared over the past four years regarding its profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.


Profitability is a class of financial metrics used to assess a business' ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2010 = $1.563 billion
  • Net income 2011 = $1.822 billion
  • Net income 2012 = $1.859 billion
  • Net income 2013 = $1.864 billion

The slow recovery in the economy is displayed in the company's increase in revenue over the past four years. In that time period, CSX's net profits have increased from $1.563 billion in 2010, to $1.864 million in 2013, which represents a 19.25% increase.

  • Operating income 2010 = $3.071 billion
  • Operating income 2011 = $3.418 billion
  • Operating income 2012 = $3.457 billion
  • Operating income 2013 = $3.473 billion

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past four years, CSX's operating income has increased from $3.071 billion to $3.473 billion in 2013. This represents an increase of 13.09%.

Operating Ratio

A ratio that shows the efficiency of a company's management by comparing operating expenses to net sales.

1 - (Operating Expenses / Revenue)

  • Operating Income

    • Operating Expenses 2010 = $3.071 billion
    • Operating Expenses 2011 = $3.418 billion
    • Operating Expenses 2012 = $3.457 billion
    • Operating Expenses 2013 = $3.473 billion
  • Total Revenue

    • Revenue 2010 = $10.636 billion
    • Revenue 2011 = $11.743 billion.
    • Revenue 2012 = $11.756 billion.
    • Revenue 2013 = $12.026 billion.
  • Operating Ratio

    • Operating Ratio 2010 = 71.13%.
    • Operating Ratio 2011 = 70.89%
    • Operating Ratio 2012 = 70.59%.
    • Operating Ratio 2013 = 71.1%

When looking at CSX's operating ratio, you can see that ratio increased in 2013. In 2012, the operating ratio was 70.59%, and in 2013, the operating ratio increased to 71.1%. As the operating ratio is a significant ratio measuring the railroad's profitability, the increase is not a positive.

CSX has a target operating ratio in the high-60s by 2015 and mid-60s over the long-term.

ROE - Return on Equity

As shareholders' equity is measured as a firm's total assets minus its total liabilities, ROE reveals the amount of net income returned as a percentage of shareholders' equity. The return on equity measures a company's profitability by revealing how much profit it generates with the amount shareholders have invested.

Net Income / Shareholders' Equity

  • 2010 - $1.563 billion / $8.686 billion = 17.99%
  • 2011 - $1.822 billion / $8.455 billion = 21.55%
  • 2012 - $1.859 billion / $8.988 billion = 20.68%
  • 2013 - $1.864 billion / $10.483 billion = 17.78%

Over the past four years, the ROE has decreased slightly. As the ROE has been relatively flat over the past four years, this reveals that CSX has generated around the same amount of profit compared to the amount that shareholders have invested.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2010 = $28.141 billion
    • Total assets 2011 = $29.473 billion.
    • Total assets 2012 = $30.571 billion.
    • Total assets 2013 = $31.782 billion.
    • Equals an increase of $3.641 billion
  • Total liabilities

    • Total liabilities 2010 = $19.455 billion
    • Total liabilities 2011 = $21.018 billion
    • Total liabilities 2012 = $21.583 billion
    • Total liabilities 2013 = $21.299 billion
    • Equals an increase of $1.844 billion

Over the past four years, CSX's total assets have increased by $3.641 billion, while the total liabilities have increased by $1.844 billion. This indicates that the company's assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2010 = $2.855 billion
    • Current assets 2011 = $2.935 billion
    • Current assets 2012 = $2.801 billion
    • Current assets 2013 = $2.602 billion
  • Current liabilities

    • Current liabilities 2010 = $2.537 billion
    • Current liabilities 2011 = $2.687 billion
    • Current liabilities 2012 = $2.627 billion
    • Current liabilities 2013 = $2.424 billion
  • Current ratio 2010 = 1.13
  • Current ratio 2011 = 1.09
  • Current ratio 2012 = 1.07
  • Current ratio 2013 = 1.07

Over the past couple of years, CSX's current ratio has remained at 1.07. As the current ratio is currently above 1, this indicates that CSX would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 shares outstanding = 1.154 billion.
  • 2011 shares outstanding = 1.089 billion.
  • 2012 shares outstanding = 1.040 billion
  • 2014 shares outstanding = 1.008 billion

Click to enlarge

CSX Shares Outstanding data by YCharts

Driven by CSX's $1.0 billion share buyback program, the amount of shares outstanding has decreased over the past four years. The company has decreased the shares from 1.154 billion to 1.008 billion.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2010 = $7.349 million / $10.636 billion = 69.09%.
  • Gross margin 2011 = $7.846 billion / $11.743 billion = 66.81%.
  • Gross margin 2012 = $7.928 billion / $11.756 billion = 67.43%.
  • Gross margin 2013 = $8.095 billion / $12.026 billion = 67.31%.

Over the past four years, CSX's gross margin has dropped slightly. The ratio has decreased from 69.09% in 2010 to 67.31% in 2013.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $10.636 billion
    • Revenue 2011 = $11.743 billion
    • Revenue 2012 = $11.756 billion
    • Revenue 2013 = $12.026 billion
    • Equals an increase of 13.07%.
  • Total Asset growth

    • Total assets 2010 = $28.141 billion
    • Total assets 2011 = $29.473 billion.
    • Total assets 2012 = $30.571 billion.
    • Total assets 2013 = $31.782 billion
    • Equals an increase of 12.94%.

Over the past four years, the revenue growth has increased by 13.07% while the assets have increased by 12.94%. This is an indication that the company from a percentage point of view has been more efficient at generating revenue.

Based on the information above, we can see that CSX has produced decent results from a fundamental point of view. Revenues over the past four years have increased by 13.07%, while the shares outstanding have been reduced by 14.58%. The company's revenues have increased more than the assets, indicating the company is more efficient at generating revenue with its assets. A couple of notable blemishes on the company are: the gross margin has dropped from 69.09% to 67.31% while the operating ratio increased to 71.1%.


There is no denying the importance of coal to CSX's bottom line. In 2013, coal shipping equated to 24.07% of the company's revenue. Looking forward, In the United States, coal consumption is expected to remain below the 2010 level for the foreseeable future. As this is the case, coal shipping revenues look to continue their steady decline.

In 2013, CSX's coal shipping revenue was 9% lower than in 2012. In 2012, CSX's coal shipping revenue declined 14% compared to 2011. Over the past couple of years, revenue from coal shipping has declined from $3.709 billion in 2011 to $2.895 billion in 2013. The reduction in coal equates to a decline of ~21.95%. So, even though coal shipping is on the decline, the ratios listed above indicate that CSX is finding other ways to source revenue.

As the U.S. economy is slowly recovering, CSX has other avenues that are "picking up the slack" regarding revenue. Leading the way in growth is chemical shipping. Volume growth in this area is being driven by an increase in energy-related shipments that included
crude oil, liquefied petroleum gas ("LPG") and frac sand. In 2013, chemical shipping increased by 13% to $1.896 billion. This equates to ~15.77% of the company's total revenue. This is up from 2012 numbers as in 2012 chemical shipping equated to ~14.31% of CSX total revenue.

Sourced by: [CSX]

Looking forward, as the U.S. slowly recovers from the 2008/2009 economic lows, I expect revenue from the Industrials and Housing and Construction to lead CSX in revenue growth over the next couple of years.


In the section below, I will use a couple of different methods to find a valuation of the stock price. In this section, I will use the Discounted Cash Flow valuation model and EV/EBITDA ratios to estimate the current value and target price for each share.

I believe using the Discounted Cash Flow valuation model for CSX to be fair, because DCF analysis can help one see where the company's value is coming from and can generate an opinion based on that.

Click to enlarge

Even though there are variations in calculating this formula, this model is based off of a terminal value of $45.221B and a WACC of 5.90%. The terminal value of $45.221B is based off of the company trading at an industry average of 9.88x EBITDA. Using this valuation, I have concluded CSX's value to be ~$32.77 per share.

EV/EBITDA = Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization

In the next section, I will use the EBITDA to calculate the EV/EBITDA. The adjusted EBITDA takes into account foreign exchange and share-based payment expenses. The EV/EBITDA ratio is one of the most commonly used valuation metrics, as EBITDA is commonly used as a proxy for cash flow available to the firm.

Enterprise Value or EV = Market Capitalization + Total Debt - Cash and Cash Equivalents.

  • EV - 28.250 billion + $9.555 billion - $592 billion = $37.213 billion
  • EV = $37.213 billion
  • EBITDA = 4.577 billion
  • EV/EBITDA = 8.13

As the Railroad sector often trades in the 9.88x trading range, an EV/EBITDA ratio of 8.13 supports the DCF valuation by indicating at current levels the stock is currently undervalued.

As the DCF and the EV/EBITDA both indicate that CSX is slightly undervalued at this point in the market, what does a future target price look like? Using the EV/EBITDA ratio along with calculating future EBITDA, cash and debt we should get a 2015 target price.

2015 Target Price

  • Estimated Net debt = $9.243 billion
  • Estimated cash and cash equivalents = $.5 billion (~same)
  • Estimated future EBITDA (2015) $5.114 billion
  • EV/EBITDA = 9.88 (industry average)
  • Shares Outstanding = 1.01 billion
  • 2015 equity value = 9.88 x $5.114 billion = $50.52 billion
  • Equity Value - net debt + cash = Enterprise Value = $41.78 billion
  • EV / Shares outstanding = $41.78 billion / 1.01 billion
  • Target Price of = $41.36 per share

Based on the EV/EBITDA formula to find a target price, I have calculated a target price in 2015 of $41.36 per share.

As of April 13th, CSX's stock was trading at $28.01 - Using the Discount Cash Flow Formula, this indicates the stock is trading below its fair value of $32.77 by 16.99%.

In calculating a target price for 2015 using the EV/EBITDA formula ratio, this indicates a valuation $41.36 per share or potential upside of 47.66%.


According to a 20-year seasonal average supplied by equity clock, April has been a positive month for CSX.

Click to enlarge

Chart sourced by (Equity clock)


At this point in the market, I would not be surprised if there was a 5%-10% correction over the next few months. If such a correction were to occur, this could present an excellent opportunity to add positions in a company with excellent growth prospects. Currently, I believe there is further upside to equity markets as major world economies are either recovering or on the verge of recovering. As interest rates continue to remain near zero, this should favor equities.


Over the past year, CSX's stock price has increased by ~17%. This has been a good run, but weighing down the stock is the reduction in coal volume and revenue. Having stated that, CSX should get a good "shot in the arm" from Housing and Construction and the industrials.

Driven by the slowly expanding economy and a strong management team that is adapting to an ever-changing economic landscape, CSX is a strong long-term candidate for your portfolio. At current levels using the Discounted Cash Flow Formula, I have calculated that CSX is currently undervalued by ~15.64%. For the reasons stated above, I believe 2014 and 2015 will be strong years for the company and have calculated a target price for 2015 at ~$41.36.

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.