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CSX Corp. Slips to Underperform

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On Feb 1, we downgraded our recommendation on CSX Corporation (CSX - Free Report) to Underperform from Neutral, owing to lackluster fourth quarter results, dismal outlook for the coal and agricultural sectors plus strict regulatory issues.

Why the Downgrade?

CSX Corporation – one of the nation's leading transportation suppliers that released its fourth quarter 2012 results on Jan 22 – failed to perform as per our expectation on the revenue front. The company’s results also fell year over year on lower volumes.

Following the release, the Zacks Consensus Estimates for the first and second quarters of 2013 stand at 42 cents and 48 cents per share, respectively. These reflect a year-over-year decline of 3.2% and 1.7% for the first and second quarters respectively. The company now carries a Zacks #5 Rank (Strong Sell).

Causes for Concern

For the coming months, the volumes and revenues of CSX Corporation are anticipated to be affected by unfavorable market demand. The company’s volume outlook remains bleak with an anticipated decline of 5% to 10% in 2013 based on weaker coal shipments.

Lower volume growth will likely result in restricted earnings growth despite continued network rationalization, improvements in service, safety and ongoing productivity enhancement programs.

Moreover, the company’s agricultural products’ business will continue to experience a downtrend given higher prices following last year’s drought. Lesser ethanol shipments and lower crop yields will likely offset growth in phosphate shipments.

In addition, competitive pressure, a unionized workforce, heavy investments and increased railroad regulation will also pose significant threats to the company’s growth goal.

Other Stocks Worth a Look

Other stocks within the transportation sector that are worth considering include Genesee & Wyoming Inc. (GWR - Free Report) – that has a Zacks Rank #1 (Strong Buy), Canadian Pacific Railway Limited (CP - Free Report) and Canadian National Railway Company (CNI - Free Report) . Canadian Pacific Railway holds a Zacks Rank #2 (Buy) and Canadian National Railway has a Zacks Rank #3 (Hold).

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