CSX Corporation's (NYSE:CSX) performance on the stock market hasn't been as good as peers Norfolk Southern (NYSE:NSC) and Union Pacific (NYSE:UNP). In fact, CSX has gained just 6% so far in 2014, while its peers have appreciated in the double digits. However, CSX is making solid progress, and just because its stock hasn't kept pace with peers doesn't mean that it is a bad investment.
In fact, when CSX reported its second-quarter results, the company delivered record revenue of $3.2 billion. The top line was up 7% from last year, driven by 8% volume growth. Its earnings also increased marginally. Looking ahead, CSX expects modest earnings growth for 2014, but in 2015, double-digit earnings growth and margin expansion are in the cards. The company has raised its capital investment forecast as well to sustain the robust growth rates it is seeing.
Hence, CSX is preparing itself for solid growth in the long run, and a look at its strategies will indicate the same.
Positive economic indicators
Going forward, CSX is focused on improving service levels and leverage the growth opportunities before it. Driven by robust macroeconomic conditions, the company's growth should improve going forward. The Purchasing Managers Index stood firm at 55.3 in June. This is a positive indicator, because a rating above 50 indicates that the manufacturing economy is expanding.
Simultaneously, the Customers' Inventories Index was recorded at 46.5 in June. A rating less than 50 suggests that there are low customer inventories. As a result, demand for manufacturing output will remain strong as customers continue filling up inventory going forward.
CSX has seen robust growth in several customer reserves, coupled with impressive growth in vehicle production, housing starts, and agricultural output. In general, the demand for rail service was very sturdy during the second quarter, and looking at the economic indicators, better times ahead cannot be ruled out.
Moreover, CSX's merchandise and intermodal business is also on a roll. Total volume in the intermodal business set a new quarterly record in the previous quarter by increasing 7%. CSX is benefiting from continued highway-to-rail conversions, which led to an 8% increase in domestic volume. Looking ahead, CSX will continue to grow its intermodal business by adding new service offerings and making strategic investments. This is important, as intermodal now accounts for almost a third of CSX's total revenue.
Its investments include the new terminal in Winter Haven, Florida, opened early last quarter; and the Montreal terminal, which is expected to open later in the year. Both these terminals are estimated to add 350,000 in annual lift capacity. Further, the expansion of the Northwest Ohio facility is forecasted to increase its capacity by 50%.
Coal is improving
CSX's coal business also exhibited improvements during the previous quarter. The business delivered a 6% increase in coal volume. In fact, domestic coal volume saw 15% increase in both northern and southern utility shipments, signifying higher gas prices, rising of stock piles, and competitive gains.
The outlook for the coal industry in 2014 is stable. As reported by Platts.com:
"Although the US coal industry's 2014 earnings are expected to decline modestly as more lucrative contracts roll off and metallurgical coal prices remain low, the outlook for producers remains stable, Moody's Investors Service said in a report Wednesday.
"We expect production volumes to rise by 2% to 3% next year off the 2013 trough of a little over 1 billion st," Moody's Vice President-Senior Analyst Anna Zubets-Anderson said."
Hence, CSX can expect to see stable demand for coal shipments going forward.
Apart from intermodal and coal, CSX expects growth in other end-markets as well. For example, the agriculture segment is improving. Feed grain shipments, including domestic and export, improved sharply as a result of a solid harvest.
Moreover, the automotive market is on track to grow once again this year. North American light vehicle production is expected to increase 9% in the current quarter, giving CSX more shipment opportunities. Also, the long run remains bright, as industry analysts expect auto sales to top 16 million vehicles this year.
CSX should continue seeing strength across its end-markets going forward. The stock might not have done as well as its peers so far in 2014, but the long term looks bright. It also has a solid dividend yield of 2.10%. Additionally, since CSX has a relatively low payout ratio of 34%, and has generated terrific operating cash flow of more than $3 billion in the past year, it won't come as a surprise if the company hikes the dividend.
As a result, it would be wise for investors to continue holding CSX in their portfolio.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.