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On Jul 29, we maintained our Neutral recommendation on CSX Corporation (CSX - Analyst Report). The company is characterized by strong Merchandise and Intermodal segments along with recovery of the construction sector and expansion of network and terminal capacity. However, the company’s performance in the near term might be impacted by certain headwinds. This Jacksonville-based leading transportation firm carries a Zacks Rank #3 (Hold).  

Why Maintained?

We believe that favorable rail industry pricing and operational improvement will aid CSX’s top-line growth and drive earnings going forward. Management aims to lower its operating ratio in the high 60s range by 2015 and to mid-60s in the long term, aided by volume expansion, cost control measures and pricing gains.

Management has adopted a number of strategic steps to achieve a high productivity level in the coming days. These include improvement in car cycle times and reduction in overtime and other associated labor costs, enabling the company to lower rent expense, materials usage and labor cost per employee while delivering a superior service to customers.

We also appreciate CSX’s consistent investments in expanding network and terminal capacity, and enhancing safety, service and reliability for its customers. Additionally, the company enjoys a number of collaborations with the regulatory bodies and displays a healthy financial position.

However, suppressed coal revenues, higher depreciation expenses and labor inflation will likely cloud these positive effects. Further, competitive pressure, a unionized workforce and increased railroad regulation will also pose significant threats to the company’s growth.

For the third and fourth quarters of 2013, the respective Zacks Consensus Estimate for earnings is 43 cents and 42 cents per share. This reflects year-over-year decline of 3.3% and 1.5%, respectively.

Other Stocks

Companies operating within the sector that are worth taking note of include AMERCO (UHAL) with a Zacks Rank #1 (Strong Buy). American Railcar Industries Inc. (ARII - Snapshot Report) and Trinity Industries Inc. (TRN - Snapshot Report) are Zacks Rank #2 (Buy) stocks.

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