Completion Of Howard Street Tunnel Project Will Strengthen Future Operations

Key Takeaways

• Infrastructure and operational improvements are expected to increase capacity and efficiency, potentially enhancing future revenue and net margins.
  
• Focus on sustainable operational efficiency and customer service improvements aims to reduce expenses and drive incremental revenue and earnings growth.
  
• Weaker commodity prices, high interest rates, weather disruptions, and project challenges threaten CSX's financial performance and earnings across multiple segments.

Catalysts

Provides rail-based freight transportation services.

• CSX's significant investments in infrastructure, such as the Howard Street Tunnel project, are expected to remove network bottlenecks and allow increased capacity, particularly for double-stacked intermodal trains, contributing to potential future revenue growth.
  
• Operational improvements and strategic rerouting to mitigate disruptions, such as the Blue Ridge subdivision repairs, are anticipated to enhance network efficiency and potentially improve net margins post-completion.
  
• The company's focus on sustainable improvements in operational efficiency, including fuel efficiency and locomotive utilization, is likely to reduce operating expenses and enhance earnings over time.
  
• The early completion of key projects promising long-term benefits, like the Cumberland site reconfiguration, positions CSX to capture future growth opportunities and increase revenue.
  
• Strategic industrial development initiatives and customer-focused service improvements are expected to solidify existing business and capture new volumes, potentially driving incremental revenue and earnings growth.

CSX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CSX's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.9% today to 26.1% in 3 years time.
• Analysts expect earnings to reach $4.2 billion (and earnings per share of $2.4) by about January 2028, up from $3.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from 18.2x today. This future PE is lower than the current PE for the US Transportation industry at 29.9x.
• Analysts expect the number of shares outstanding to decline by 3.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

CSX Future Earnings Per Share Growth

Risks

• Weaker commodity prices, particularly lower global coal prices and reduced fuel surcharges, have been impacting CSX's revenue negatively, and if these trends continue, they could further pressure financial performance.
  
• The flat U.S. industrial production and high interest rates create a challenging environment that can lead to stagnant or declining revenue growth, as these factors directly affect key customer markets.
  
• Persistent weather-related disruptions, including hurricanes and bridge collapses, have previously led to increased operational expenses and reduced earnings, which could pose ongoing risks if such events recur.
  
• The potential for coal volume decline due to scheduled plant closures and temporary production outages at coal mines may lead to decreased revenue and negatively impact earnings in the coal business segment.
  
• The substantial execution and expense challenges associated with the Howard Street Tunnel and Blue Ridge rebuild projects are likely to increase costs and suppress earnings before expected benefits materialize.

Valuation

• The analysts have a consensus price target of $37.09 for CSX based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.0 billion, earnings will come to $4.2 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $32.68, the analyst's price target of $37.09 is 11.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.