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CSX Rides on Volume Growth & Lower Tax Rates Amid High Debt

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We have issued an updated research report on CSX Corporation (CSX - Free Report) on Feb 28. While strong volume growth and lower tax rates buoy optimism on the stock, high debt levels are concerns.

Factors Influencing CSX’s Performance

The Jacksonville, FL-based company is gaining momentum on the back of volume growth and strong pricing. Improvement in operating ratio (operating expenses as a percentage of revenues) is an added positive. Lower value of the key metric bodes well for the company. Due to such improved operational efficiency, CSX expects to achieve operating ratio target of 60% in 2019 instead of 2020 expected earlier.

Moreover, the current tax law, which lowers corporate tax rate significantly, is a huge positive for CSX. The provision of the law, which facilitates capital expenses to be deducted in the year that incurred the same, is a huge positive for the company. For the first quarter of 2019, CSX expects effective tax rate between 24% and 24.5%.

Further, we are impressed by the company's efforts to reward shareholders in the form of dividend payments and buybacks.  In February 2019, the company announced a 9.1% dividend hike to 24 cents per share. In January 2019, the board of directors cleared a new $5-billion share buyback program following early completion of the previous one. Also, adjusted operating cash flow increased 29% year over year in 2018 to nearly $4.7 billion. This reflects the company’s robust cash generating capabilities.

A glimpse of this Zacks Rank #3 (Hold) company’s price performance reveals that it has outperformed the industry in the past year. The stock has rallied 32% compared with the industry’s rise of 25.1%.

Additionally, the company has an impressive VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three scores.

On the flip side, a high debt-laden balance sheet is a concern. As of Dec 31, 2018, long-term debt totaled $14,739 million compared with $11,790 million at the end of 2017. Also, successive decline in volumes at the company's fertilizer segment is a worry. Notably, fertilizer volumes declined 15% year over year in 2018.

We are also concerned about CSX's projection for 2019 revenue growth. The company expects revenues to improve in low single digits in the current year.

Stocks to Consider

Investors interested in the broader Transportation Sector may consider Azul S.A. (AZUL - Free Report) , Frontline Ltd. (FRO - Free Report) and Expeditors International of Washington, Inc. (EXPD - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

All the three stocks boast an impressive earnings surprise history. Azul outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the average being 97.9%. Frontline outpaced the consensus mark in each of the trailing four quarters with an average of 69%. Expeditors outpaced the consensus mark in each of the trailing four quarters with an average of 14.5%.

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