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Here's Why You Should Retain CSX Stock in Your Portfolio Now

CSX Corporation CSX is being aided by strong performances of its coal and merchandise units. Efforts to reward shareholders also bode well. However, headwinds like labor shortage, supply-chain disruptions and intermodal woes are hurting the stock.

Let’s delve deep.

Favorable Factors

CSX’s top line is benefiting from higher export coal volumes, domestic intermodal shipments, volume growth in other segments and pricing gains. Evidently, coal revenues increased 36% in 2022 driven by strength in export coal.  High export coal prices and fuel surcharge revenues are expected to bolster the top line in the near term.

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The merchandise unit is also expected to perform well. CSX projects revenue ton miles to grow in low-single digits in 2023 backed by strong performances in the merchandise and coal units.

The company’s commitment to reward shareholders is encouraging. In February 2023, CSX announced a 10% hike in its quarterly dividend to 11cents per share. In 2022, it rewarded shareholders to the tune of $5,583 million through buybacks ($4,731 million) and dividends ($852 million).

CSX’s cash and cash equivalents were $1,469 million at the end of first-quarter 2023, much higher than the current debt of $11 million, implying that the company has sufficient cash to meet its current debt obligations.

Key Risks

CSX’s operations are being hurt by supply-chain disruptions, including labor and equipment shortages. Revenues from the intermodal segment (internationally) are expected to be hurt in the near term due to headwinds like inflationary pressures.

High costs due to increases in labor and fringe expenses, purchased services and other, and fuel expenses are limiting CSX’s bottom line. In 2021, total expenses rose 11% year over year due to 12%, 24% and 69% increases in labor and fringe expenses, purchased services and other, and fuel costs, respectively.

In 2022, operating expenses increased 27% year over year, mainly due to 78% rise in fuel expenses. The hike in fuel costs was due to a steep rise in highway diesel fuel prices and the addition of non-locomotive fuel used for trucking.

CSX’s high capital expenditures may further impede its bottom line. During 2021, the company’s capital expenditures were $1.79 billion, higher than $1.63 billion in 2020. In 2022, capital expenses were $2.1 billion.

In 2023, capex is expected to be $2.3 billion. High capex may also hurt the company's free cash flow generating ability.

Zacks Rank & Key Picks

CSX currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks for investors interested in the Zacks Transportation sector are Copa Holdings CPA and Allegiant Travel Company ALGT. While Copa sports a Zacks Rank #1 (Strong Buy), Allegiant carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Copa Holdings is benefiting from an improvement in air-travel demand. In first-quarter 2023, passenger revenues increased 28.5% from first-quarter 2019 levels due to higher yields.

CPA’s focus on its cargo segment is encouraging. In first-quarter 2023, cargo and mail revenues grew 51.8% from first-quarter 2019 levels on higher cargo volumes and yields.

Copa Holdings' fleet modernization and cost-management efforts are commendable. The Zacks Consensus Estimate for current-year earnings has been revised 6.15% upward over the past 60 days.

Allegiant is seeing a steady recovery in domestic and leisure air-travel demand. In first-quarter 2023, operating revenues grew 29.9% on a year-over-year basis. Passenger revenues, accounting for 93.7% of the top line, increased 31.3% on a year-over-year basis.

Allegiant's fleet-modernization efforts are encouraging. The Zacks Consensus Estimate for ALGT's current-year earnings has been revised upward by 40.16% in the past 60 days.

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