How Crucial Is Domestic Business For CSX?

Sep. 3.14 | About: CSX Corporation (CSX)

Summary

The tightening truck capacity in the United States will help CSX make good on the investments.

Transport costs for trucks are 10 times more expensive than railroad transport costs.

There are several reasons why demand in the domestic market could be high in the years to come.

CSX's (NASDAQ:CSX) intermodal business consists of two different transport modes. They are rail-to-truck and rail-to-ship. This business was successful in achieving 39.3% of the volumes for CSX. The second quarter earnings for 2014 were exceptionally high since international shipments to ports in the United States increased. It is believed that following this high international demand during the second quarter, international demand during the rest of the year will remain slow.

To account for that, the domestic demand for CSX's intermodal business is said to experience a rise. Furthermore, the tightening truck capacity in the United States will help CSX make good on the investments it is making to expand the capacity of its business, to reap larger gains.

Tightening truck capacity

In order to supplement for the tightening truck capacity that the country is facing, intermodal businesses are experiencing a rise in the demand for their services. Fleet sizes of truck services and non-availability of drivers is exerting a negative impact on the freight capacity of the truck industry in the United States. Furthermore, because railroad seems to be offering more advantages in terms of costs, a lot of people are now shifting, or are considering shifting, to railroads. Transport costs for trucks are 10 times more expensive than railroad transport costs making truck transport less preferred for long hauls.

The improved economic output has led to a spur in growth of industrial production in the country. The growth of this output has increased by 3.9% in the first quarter and 5.3% in the second quarter of this year. This growth is stimulation for demand of freight transport and this demand cannot be completely met by the truck industry due to the constraints it is currently facing.

Steps taken by CSX

CSX had estimated that in 2014 the business will experience a 500,000 units growth in demand for its intermodal business. Based on these estimates, the company took steps to expand its capacity and build new terminals so that it could cater to the growth of this demand.

The company made an investment in terminals in Winter Haven that began functioning in the second quarter. Investments in Montreal are expected to begin operating later this year. These two terminals alone will increase capacity by 350,000 units.

The company has also made long term plans for projects in Pittsburgh and Baltimore. Expansion projects have also been undertaken for the terminals that the company already has in Boston, Charlotte, Louisville, Columbus and Atlanta.

CSX has partnered with National Gateway for a project that will increase the use of double stacked trains by building clear rail corridors for better rail traffic. These kinds of trains offer better fuel effeciences and are more economical and environment friendly. The amount of CSX's intermodal volumes commuting through double stacked clear lanes amount to about 90% and are expected to increase to 95% once the project with the National Gateway is completed in 2015.

Why is domestic demand expecting a boost?

There are several reasons why demand in the domestic market could be high in the years to come.

CSX is one of the major transporters for coal in the country. About two years ago, when natural gas prices experienced a decline, many businesses chose to move away from higher polluting fossil fuels and covert their utilities to use natural gas instead. The low demand for coal exerted its impact on CSX as well, when its service demands declined. Since then, the demand for natural gas has steadily increased gas prices in the market. The coal market that was previously struggling due to low natural gas prices now seems to be recovering since there is a lot of potential for domestic utilities to rebuild their coal inventories while foreign buyers could independently consider importing coal from the United States to meet the demand for energy. This recover in coal ultimately means that CSX's demands will increase and boost revenues for the company.

The increase in oil and gas exploration in the United States revealed that there was inadequate infrastructure to transport the oil extracted from these explorations. Exploration took place in remote areas, where pipelines were not constructed to transport oil. CSX was one company that benefitted from the use of rail to transport oil to the refineries in the country and secured revenues through this avenue when coal demand slumped in the country.

Conclusion

If these trends remain in play for the company, the shares for the company could experience great gains in the years to come. Currently, investors are generally happy with the way the stock of the company has been doing in the market. More good news is expected since the lack of capacity in the truck industry shows no signs of expansion.

Even if coal demand does not recover drastically to increase the use of CSX services for that purpose, their services would still be in high demand due to the continuous need of transport of supplies to the exploration site and transport of oil from the exploration site to refineries. Revenue growth does not show any sign of stagnating in the future and that looks very promising for current and future investors of the company.

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.