CSX Corporation’s (NYSE: CSX) stock price hasn’t seen much growth year-to-date. The company’s freight business has benefited from higher fuel surcharges and growth in Intermodal shipments in the recent quarters. We expect these trends to continue in the near term, and maintain our $80 price estimate for CSX. In this note we analyze the factors that could result in a 30% correction in our price estimate in 2019. We have created an interactive dashboard ~ What Can Cause A 30% Decline In CSX Stock Price In 2019 ~ which shows our analysis for the base case of $80, and a target scenario of $56, representing a 30% decline. You can adjust the drivers to see the impact on the company’s stock price estimate.
CSX’s three key segments are Coal, Intermodal, and Merchandise. Lower coal consumption in the U.S. could drag the domestic coal volume lower. In fact, domestic coal tonnage was down 9% in the nine month period ending September 2018. Also, as per the latest EIA estimates of 650 million short tons (mst), coal consumption in 2019 will mark the year with the lowest coal consumption over the last 40 years. Looking at Intermodal business, with the trucking industry aiming to add more capacity, CSX’s Intermodal volume growth could slow. The railroad companies benefited from trucking capacity constraints in 2018, amid the full implementation of the ELD mandate. However, the trucking industry is now looking to add more capacity. CSX’s Merchandise freight could also be impacted by global trade tensions over tariffs.
Looking at the margins, we forecast CSX’s EBITDA margins to be around 49% in 2019 in our base case. However, the company could see up to a 300 basis point decline in margins in 2019, due to possible pricing woes. Crude oil prices have fallen significantly over the last two months. If this trend continues, CSX could see mid-single digit declines in average revenue per carload, given there is a fuel surcharge component involved. The company is already sitting at a record low operating ratio, and there may be limited room for margin expansion. Any sign of lower volume in Intermodal and Merchandise segments could also hurt the pricing. These factors in turn could result in a lower earnings multiple for the company. Overall, for CSX Corporation, EBITDA per share will have to decline to $6.25 next year, as opposed to our forecast of $7.50, and roughly a 170 bps decline in the multiple for the company to see a 30% correction in our price estimate.
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