Business snapshot
CSX is considered to be one of the U.S. leading transportation companies, providing different transportation services such as traditional rail service, intermodal containers transport and trailer transport. CSX is operating in three main business segments including the merchandise business, the coal business and the intermodal business. The majority of 2012 revenue, $6.7 billion, or 57% of the total revenue, was generated from the merchandise business, which transported around 42% of the total 2012 volume of the company. The coal business ranked second, with $3.17 billion in revenue, or 27% of the total 2012 revenue while the intermodal business generated about $1.64 in revenue.
A cyclical business that is improving
The transportation business is quite cyclical, meaning that the business fluctuates along with the ups and downs of the overall economy. Indeed, CSX Corporation (NYSE:CSX) experienced a significant drop in both revenue and income in 2009, followed by steady improvement since 2010.
CSX Revenue TTM data byYCharts
As the general economy improves, its top and bottom lines exceeded those levels reached in 2008. Compared to 2008, the revenue has increased by 13.9% while the net income has risen by 28.5%, due in large part to lower operating expenses. Since 2008, its operating ratio has been declining. The operating ratio equals annual operating expenses divided by annual revenue, excluding non-recurring items. For the past five years, its operating ratio dropped from 75.6% to only 70.6%. Furthermore, income investors would like CSX a lot due to its consistent increasing dividends. In the past ten years, its dividend has increased from $.07 in 2003 to $.54 in 2012. The dividend yield is currently staying at 2.14%.
Historically, CSX has consistently generated positive cash flow. In 2012, the operating cash flow was $2.95 billion and the free cash flow was $605 million. The consistent cash flow allows the business to leverage substantially. As of December 2012, it had nearly $9 billion in total stockholders’ equity, $1.37 billion in cash and short-term investments and more than $9.8 billion in debt. In addition, CSX Corporation (NYSE:CSX) had more than $8 billion in deferred tax liabilities, which are considered interest-free loans from the government.
Peer comparison
CSX is trading around $23 per share, with a total market cap of around $23.5 billion. The market is valuing CSX at nearly 7.1 times EV/EBITDA. Compared to its peers including Norfolk Southern Corp. (NYSE:NSC) and Union Pacific Corporation (NYSE:UNP), CSX has the cheapest valuation. Norfolk Southern, with a trading price of nearly $75 per share, is worth around $23.5 billion on the market. The market values the company at 7.84 times EV/EBITDA. Union Pacific is the biggest company among the three, with a total market cap of more than $65 billion. At $138 per share, Union Pacific is valued the most expensive, at nearly 8.6 times EV/EBITDA.
Union Pacific seems to deserve a higher valuation than the other two, thanks to its higher profitability. Its operating margin is the highest at 32% while the operating margins of CSX Corporation (NYSE:CSX) and Norfolk Southern are 29% and 28%, respectively. Among the three, Norfolk Southern pays the highest dividend yield at 2.6% while Union Pacific pays the lowest yield at 1.9%.
Foolish bottom line
With a high operating margin, improving operating performance, consistent cash flow and dividends, and reasonable valuation, CSX could be considered a good long-term stock to hold for income investors.
The article This Company Could Become One of Warren Buffett’s Favorites (Part 6) originally appeared on Fool.com and is written by Anh HOANG.
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