CSX Corp

CSX Corp (CSX - Analyst Report) was one of the first companies to kick off earnings season when it reported its third quarter results on October 12. Many eyes were on the southeastern railroad company because it also serves as a bellwether to the overall economy.

The company did not disappoint.

CSX reported excellent earnings growth driven by double-digit volume gains. The company also remains upbeat about the future as it announced capital spending increases and additional share buy backs on the heels of another dividend increase.

Solid Third Quarter

CEO Michael Ward noted in the latest earnings release that the company saw volume growth in nearly every market as the economy continued to improve.

Total revenue increased 16% year-over-year driven by an overall volume gain of 10%. Growth was particularly strong in its automotive segment as vehicles sales improved significantly in the U.S.

Operating leverage helped CSX turn its 16% revenue increase into a 39% increase in operating income. Lower interest expense and fewer shares outstanding drove earnings per share up 48% to $1.08 in the third quarter. That beat the Zacks Consensus Estimate 4%.

Positive Outlook

Virtually every analyst raised their earnings estimates for 2010 and 2011 following the strong quarter. The flurry of positive estimate revisions propelled the stock to a Zacks #2 Rank (Buy) stock.

The 2010 Zacks Consensus Estimate is $4.02, corresponding to 40% growth over 2009 EPS. The 2011 estimate is 16% higher, at $4.65.

The company also announced it would be increasing its capital expenditures for the remainder of 2010 - a sign that management is optimistic about the company's future.

Returning Value to Shareholders

The company will also be using its capital to buy back additional shares. The company plans to spend around $646 million to repurchase its shares by the end of the first quarter of 2011.

The company also announced in September that it was raising its dividend. After holding its dividend steady for a few years, CSX has increased it 8 times since 2005 at an average annual clip of 39%.

The stock currently yields 1.6%.

Valuation

Shares trade at 14.7x forward earnings, a discount to the industry average of 19.0x. It has a PEG ratio of 1.3, also below the industry average, which is 1.7.

Its price to book ratio of 2.6 is twice that of the industry average. However, its return on equity of 16.4% exceeds the industry average of 7.0%, justifying the premium.

The company has a market cap of $22.5 billion. It is based in Jacksonville, Florida.