CSX Building Out in Quebec

CSX Corporation (CSX - Analyst Report) plans to build an intermodal facility in Quebec. The construction will include an intermodal rail terminal using 89 acres of land, connecting CSX’ intermodal network across the U.S. We expect the new development project to benefit the company’s growing freight business and thereby lead to revenue accretion.

CSX Corp. continues to invest in expanding network and terminal capacity, as well as enhancing safety, service and reliability for its customers. The company launched the National Gateway, a multi-year public-private infrastructure initiative, which will significantly improve the efficiency of the freight network between the Mid-Atlantic ports and the Midwest. Total project costs are approximately $850 million, of which CSX Corp. expects to contribute approximately over $550 million.

Additionally, CSX Corp. entered into a deal with Florida state regulators to deploy computerized rail operation called SunRail. The contract entails CSX to sell a 61-mile rail corridor to the State of Florida and in exchange receive exclusive rights to operate on the SunRail track. The new system is expected to start operating in 2014.

Going forward, CSX plans to invest the $500 million sale proceeds of the deal for the development of Florida rail infrastructure. Overall, the company invested $2.2 billion in 2012 and estimates the investment of $2.3 billion in 2013.

We expect these investments to remain accretive over the long term, supporting volume growth. However, given the current economic backdrop, these investments can weigh on the margins in the foreseeable future until there is significant improvement in the market fundamentals that will drive revenues upward.

Besides CSX, other companies that accelerated their capital investments in railroad development include Union Pacific Corporation (UNP - Analyst Report) and Norfolk Southern Corp. (NSC - Analyst Report). Last year, Union Pacific invested approximately $3.7 billion and Norfolk Southern spent approximately $2.2 billion.

Other Stocks

Another stock worth considering within the sector is Genesee & Wyoming Inc. (GWR - Snapshot Report) that holds a Zacks Rank #1 (Strong Buy rating).

Currently, CSX Corporation has Zacks Rank #5 (Strong Sell) rating.