The First To The Party
As I expected, CSX (NYSE:CSX) Q4 2014 numbers were quite impressive, and full-year numbers resulted in significant revision to metrics and valuations. This could foretell equally strong results coming from peers Union Pacific Corporation (NYSE:UNP), Kansas City Southern (NYSE:KSU), Canadian Pacific Railway Limited (NYSE:CP), and Canadian National Railway Company (NYSE:CNI).
On the January 14, 2015 earnings release Clarence Gooden, chief commercial officer, said, "So I think lower crude oil prices is very positive for our economy and very positive for CSX." CSX indicated that it is expecting double-digit EPS growth and volume growth above the growth in the general economy in 2015. Additionally, CSX should benefit in productivity savings due to better weather and workforce reduction to the tune of $200 million.
With CSX's release, the little known rationale that fuel savings for the railroads should far super-cede declines in rail volume has now begun to be taken up much wider by the market. William Greene of Morgan Stanley wonders if CSX "knows something we don't?"
2015 Looks to Continue Trend
CSX remains very bullish on prospects going forward, "We expect to continue growing our intermodal and merchandise businesses faster than the economy, pricing above inflation, and driving efficient asset utilization," CEO Michael Ward said with the release. While some of this savings has come from the drop in fuel this has been partially offset by reductions in fuel surcharges that CSX passes on to customers.
CAPEX at CSX will include additions of more locomotives and headcount to increase efficiency as CSX aims to reduce their operating ratio into the mid-60's from the current 71.5%, which could lead to as much as a 0.50 jump in EPS in 2015.
CSX outperformed the S&P 500 by more than 13% in 2014, and given the strong performance momentum could put up similar outperformance in 2015, continuing a multi-year run of growth in earnings and profitability.
Revising My Metrics
Now that full 2014 results are in, I can fully revise my metric screen for CSX and project some valuations. The five year projected PEG (per Yahoo Finance) has fallen to 1.64, and I calculated the forward looking mPEG as 0.75, a very bullish signal. The dividend yield, while still below 3%, have appreciated noticeably to 1.91% and I would expect to see the analyst score of 2.4 drop in CSX's favor in short order. Using the 2014 EPS results the DCF Fair Value (excluding tangible book value) comes in at 50.15, a 49% increase from the most recent closing price, and the DCF Fair Value (including TBV) comes in at 61.32, an 82% increase. My own proprietary Intrinsic Value Calculation calls for 58.91, which is a 75% increase. The current consensus target price is 36.43, but again I expect to see this revised upward soon as CSX is likely to take that out soon.
Comparing the results for the DCFi/DCFx and IVC for 2014:
DCFi Projected: 33% increase (27% actual from Jan 2, 2014 to Jan 2, 2015)
DCFx Projected: 63% increase
IVC Projected: 45% increase
While we have to wait to make the determination of which of the 6 railroads I cover [counting BNSF via Berkshire Hathaway [(NYSE:BRK.A) (NYSE:BRK.B)] is the best investment looking forward until all the results are in, CSX remains an excellent holding and warrants additional consideration at these levels as forward momentum for the company appears to be very strong. While a risk does remain that low oil prices could eventually imperil the shale oil industry it is likely beyond 2015 before this would impact CSX's bottom line. When oil prices do eventually begin to recover the two month lag on revising fuel surcharges that have worked in CSX's favor will whipsaw in the opposite direction and cause some earnings impairment at that time. Also, there is a small possibility that freight could be shifted back to trucking and away from railroads but the lack of truck drivers makes this unlikely in the short-to-near term.
I am bullish on CSX as a strong buy here, consider them a core holding, and looking forward to how 2015 shapes up going forward.
Disclosure: The author is long CSX, UNP, CNI, CP, KSU, BRK.B.
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.