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CSX Gains from Precision Scheduled Railroading, Up 15% YTD

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CSX Corporation (CSX - Free Report) has rallied 15.4% so far this year, significantly outperforming the industry’s increase of 6.2%.



 

Reasons Behind the Price Increase

The new tax law has been aiding the company immensely since its implementation in December 2017. In first-quarter 2018, the bottom line was up 52.9% owing to the reduced tax rate as well as lower costs. Moreover, CSX’s effective tax rate in the quarter was 23.8%, much less than 37.8% reported in the year-ago quarter. The momentum is expected to continue in the current year as well.

Apart from bottom-line growth, huge savings from the tax cut will lead to an increase in free cash flow. As a result, the company will have more cash in hand to fund share repurchases and dividends among other things.

Furthermore, it has an impressive track record of dividends and share buybacks. In February 2018, CSX announced a 10% dividend hike. Simultaneously, the company increased the existing share repurchase program to $5 billion.

The company’s Precision Scheduled Railroading model, adopted last year also seems to be paying off. The model, which reduces costs, enhances services and optimally uses assets of the company, generated efficiency-related savings to the tune of $460 million in 2017.

At the 2018 investor conference held in March, the company stated that the new model will lead to top-line growth backed by volume and pricing gains from the merchandise and the intermodal segments. Moreover, scheduled railroading is anticipated to provide greater agility to coal markets, which in turn, will drive growth.

In fact, by 2020, CSX expects to achieve an operating ratio (operating expenses as a percentage of revenues) of 60% and outpace the industry. Traces of the company’s progress are evident from its first-quarter performance, wherein it reported an operating ratio of 63.7% compared with 73.2% in the prior-year quarter.

These tailwinds place the company on a solid path for long-term growth. It has a long-term growth rate of 13.3%.

Zacks Rank & Key Picks

CSX carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are SkyWest, Inc. (SKYW - Free Report) , Expeditors International of Washington, Inc. (EXPD - Free Report) and GATX Corp. (GATX - Free Report) . While Expeditors sports a Zacks Rank #1 (Strong Buy), SkyWest and GATX carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of SkyWest, Expeditors and GATX have rallied more than 61%, 37% and 20%, respectively, in a year.

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