Berkshire Hathaway does not intend to purchase CSX, a move we thought was the likely outcome given the competitive offering of an East/West combination. The valuation and merger benefits are clearly not appetizing to Berkshire; we now believe BNSF may only acquire CSX if backed into a corner following Union Pacific+Norfolk Southern deal approval and co-op agreement disappoints. We adjust our valuation framework, and our CSX PT (price target) moves to $38.
CNBC reported that Berkshire met with CSX in Omaha in early August and made it clear that BNSF would not make a bid for CSX. This followed the announcement of a new intermodal partnership between the two carriers that would offer coast-to-coast service, with the hopes of achieving a transcon-like service without combining railroads. Subsequently, CPKC issued a release disclosing that the Canadian Class I will not participate in consolidation and further maintained that consolidation is not essential for the industry. Recall that activist Ancora had suggested a CSX-CPKC match (though we viewed this as less value accretive than an east-west combination). CSX stock fell 10%-plus over the past week as the deal likelihood declined. With Berkshire showing no desire for consolidation, we adjust our valuation framework to our previous methodology of a forward earnings valuation and away from a takeout PT. We now believe BNSF may only acquire CSX if it’s backed into a corner following UP+NS deal approval and/or the partnership agreement doesn’t resonate as a competitive option.
With only one transcon merger currently on the table, a few important questions must be considered:
- Will this give the STB an easier hurdle for downstream effects?
- Does one transcon merger create a competitive advantage and reduce competition (i.e. would the decision be easier for the STB if there were two transcons) and ultimately make the approval process more difficult?
- Will BNSF ultimately be pushed into a CSX bid if the STB approves UP+NS (or the likelihood of approval becomes evident).
- How big is the value/service delta in a transcon partnership agreement vs. a combined railroad?
The prevalence of interline agreements among peers is unlikely to be enough to scuttle STB approval of a UP+NS deal in our view. While the Board acknowledges positives from interline agreements, it has also conceded numerous times in prior proceedings that mergers offer key operational benefits over and above voluntary agreements. Thus, a potential UP+NS single-line would present a superior product to anything achievable via interline agreements. As a result, we believe that positive developments in the UP+NS proceedings could force the hands of the Western holdout.
With CSX –10% over the past three trading days, merger-related outperformance relative to the overall market has now been largely extinguished, and we do not believe the stock reflects the chance of a takeout at this time. While the shoe appears to have dropped on CSX with Berkshire’s walking away, shares of NS still likely incorporate some merger premium (albeit diminished), and trading should reflect STB developments going forward.
We maintain our 2025 and 2026 EPS estimates for CSX, though we adjust our valuation methodology to a forward PE multiple (as we have done in the past). Using our unchanged 2026 EPS estimate of $1.95 and a 19.5x multiple, our PT moves to $38. Despite our drop in our PT, we believe CSX still presents a good opportunity for longer-term investors given current levels. CSX remains the only railroad in our universe that could grow earnings in 2026 even if volumes do not grow. Additionally, our forecasted OR for 2026 may call for a 210 bps improvement, but it is still more than 500 bps worse than the average OR the Eastern rail giant posted in the 2019-2021 timeframe.
STB on Mergers vs. Interline Agreements
CP+KCS, 2023: Railroad mergers frequently can achieve a degree of coordination beyond that which is available under voluntary coordination agreements.
Santa Fe+Southern Pacific (SPSF, “Shouldn’t Paint So Fast”), which STB predecessor Interstate Commerce Commission denied in 1986: Without the unified management resulting from the merger, few if any of the operating economies projected under the Operating Plan are attainable.
