At its Nov. 6-7, 2024 Investor Day, CSX outlined a long-term vision for growth. Management, led by President and CEO and Railway Age 2025 Railroader of the Year Joe Hinrichs, focused on service, partnerships, being agile, and leveraging old and new opportunities. Long term earnings guidance was a tad underwhelming, with CSX calling for high-single to low double-digit earnings growth, but at the same time warning that 2025 could come with some headwinds. CSX is a high-quality company with solid fundamentals that appears well positioned to benefit from long-term economic growth.
Base Case Assumptions: Rail volume recovery picks up as inventory restocking resumes, and CSX maintains its ability to command solid pricing.
Upside Scenario: Global demand for U.S. coal picks up, and truckload capacity tightens thereby allowing the rails to raise prices on the intermodal product. Service improvements pick up pace.
Forthcoming Catalysts: Long-term intermodal growth to be driven by the ongoing shift from the highway as well as the expansion of some of the company’s hubs. Potential longer-term benefits from the ongoing operational turnaround plan. Downside Scenario: The rail pricing recovery is delayed. Truckload capacity remains materially elevated. The
Volume Outlook
On the volume side, CSX is calling for low to mid-single digit gains assuming a more normalized economic backdrop. While we agree this assumption is very reasonable, we do understand why some may question it given the railroad industry’s inability to show much growth over the past decade. We have to level-set the environment we are coming from to understand CSX’s projections. The trucking industry (rail’s #1 competitor) remains mired in a two-plus-year slump, which is the longest downturn Jason Seidl has witnessed in more than three decades of being involved with the supply chain.
Truckload rates have plummeted over the past two years and are just starting to rebound. The severe downturn in rates attracted a lot of business from the railroads, causing a modal switch away from domestic intermodal and some merchandise traffic. As over-the-road rates recover, we believe a substantial portion of shifted freight will naturally move back to the rail sector.
CSX also plans to leverage recent and future additions to its service offerings. Transflo, CSX’s transloading business, continues to add locations at a very low incremental cost to serve the Ag, Chemical and Forest Products and expand its addressable market. The railroad is also pushing to serve more inland ports that help leverage freight coming into the east coast and adapt to changing customer needs.
Pan Am Railways (a Class II railroad acquisition completed in mid-2022) and the MNBR (a recently completed Class III acquisition) are among transactions that can benefit CSX in the future. The Pan Am required a lot of investment (more than $100 million to upgrade its infrastructure) from CSX since its purchase and now stands to help the Eastern rail giant grow its intermodal, automotive and merchandise business. The MNBR (which was acquired from Genesee & Wyoming in a joint deal with CPKC) should help CSX flow business into the Southeast from Texas and Mexico.
CSX is also poised to improve its intermodal service in the I-95 corridor by expanding the Howard Street tunnel to enable it to carry double-stack intermodal trains. This would assist CSX’s ongoing efforts to convert more trucking freight on its network and increase the productivity of the intermodal product. All these projects and acquisitions could add an incremental 600-700,000 units over the next three to five years for CSX.
An anticipated growth in industrial development projects should also help CSX restore growth across its network. There has been an increasing amount of industrial investment happening in the U.S., with 100 projects per year coming on line. The pipeline is very large at 500 new customer sites being targeted and are heavily focused in the east (Maine-Miami-Chicago-New Orleans). This is roughly double what the pipeline was five years ago, according to CSX VP of Business Development and Real Estate Christina Bottomley. Over next three years, the railroad estimates these projects could add 150,000-300,000 carloads, which would help net carload growth by 1%-2%.
Pricing Expectations
hile the aforementioned pricing pressures in the trucking market have kept intermodal’s ability to price its product offering at bay, CSX is confident that it can exceed cost inflation going forward. We agree, especially since truckload rates are showing early signs of improvement on the contract level for the first time in a while. Add this to an anticipated improvement in service product, and we believe the building blocks are in place for a recovery in the price-to-rail cost inflation gap, which has been recovering since hitting a low point in 2022.
Productivity Gains, Network Optimization
Management talked a lot about building resiliency in its network, creating speed and increasing fluidity. It appears to be working too as evidenced by the very quick service recovery after the recent hurricanes that hit CSX’s system. Technology is being deployed across the network with a focus on real-time data updates for the system. This will enable the railroad to be more productive and react quicker to real time changes in the supply chain.
CSX has also focused on improving the fluidity of the network with the Cumberland optimization as a strong example of what can be done. The network design team rerouted freight via minimal yard changes and modest capital spending. These changes resulted in 59,000 fewer car handlings, 29,000 fewer out-of-route miles and $15 million of direct savings, with more savings likely due to network fluidity benefits. Currently, there are eight other facility reconfiguration project opportunities like Cumberland (albeit smaller in nature, according to management) that should be able to help with efficiency and fluidity.
The Guide
CSX put out three-year targets for volume (mid-low single digit), revenue (mid-single digit), operating income (mid-high single digit), EPS (high single digit to low double digit) and capex ($7.5-8.0 billion). While not explicitly providing 2025 guidance, EVP and Chief Financial Officer Sean Pelkey noted some headwinds (coal, hurricane recovery spill over, and Howard Street Tunnel project work) that may prevent the railroad from getting to the high end of their long-term EPS growth range next year. We view the long-term topline guide as reasonable given where we are in the trucking cycle, current economic backdrop, and projected mix (likely to depress overall yield gains with more intermodal). The operating income and bottom-line guide also seems very reasonable with some hints of conservatism. Indeed, with capex range bound for the next few years, the railroad should generate more cash to deploy to investors. However, the official guide was for “modest dividend growth and opportunistic buybacks.”
We are maintaining our 2025 EPS estimate of $2.10 and PT of $35 and reiterate Hold. We rate CSX shares Market Perform as the company offers long-term investors a chance to leverage the U.S. and global economies but is likely to face export met coal headwinds. Risks to our rating include economic downturns, the company’s inability to receive compensatory prices on its services, and competition from other railroads. On the other hand, our Market Perform rating may represent a missed opportunity if the rate of economic growth accelerates significantly or pricing greatly improves.
