Shares of rail freight transporter CSX (CSX) - Get Report have taken quite a hilly route so far this year.

At Tuesday's closing price of $30.82, the stock is down 18% from its May highs, but still up 20% year-to-date.

At current levels, CSX trades at 12 times expected 2007 earnings of $2.54 a share. This represents 16% projected year-over-year profit growth from the current year. That's a good sign because a stock is generally considered attractively valued when it trades at a discount to its growth rate.

However, I'm here to answer investors' questions: Should I do it? Is CSX headed down the right track? Or has the stock's multiyear rally reached the end of the line?

Volume and Demand

CSX is the third-largest railroad in the U.S., with 22,000 miles of track across 23 states. Demand for its transport is highest for coal, but the company also helps to move steel and grains (including ethanol), as well as other industrial merchandise across its tracks.

Coal demand remains strong, especially as more electric utilities are finding it cheaper to burn than natural gas. On the other hand, merchandise shipments are economically sensitive, as noted by

Ford's

(F) - Get Report

recent production cuts. Automotive shipments accounted for 9.2% of CSX's total revenue in the second quarter of 2006.

Back in July, CEO Michael Ward said the company's overall shipment volume was expected to improve 4% to 6% annually in the second half of 2006. While management has yet to provide an update on his guidance, according to a research note from JPMorgan analyst Thomas Wadewitz, who added CSX stock to his firm's focus list on Monday, CSX's "third-quarter volume growth through week 35 is up 3.4% year-over-year vs. our original estimate of 1%."

This follows a 2.4% decline in 2005 and just 0.1% year-over-year growth in the second quarter of this year. Despite this minimal volume growth, CSX posted 12% annual revenue growth in the second quarter, as the company boosted prices in the face of a 64% annual increase in diesel costs.

Power in the Pricing

But beyond fuel surcharges, CSX and other railroad operators have real pricing power. More shipments are moving from the truckers to the rails, and demand remains ahead of industry capacity. As a result, CSX believes core pricing will rise 5% to 6% both this year and in 2007.

CSX also returns cash to its shareholders through buybacks and a 10-cent quarterly dividend (1.3% yield). Management said in July that it will repurchase $500 million, or 16.4 million shares, of the company's stock over the next year. CSX also has a stable balance sheet with debt equal to 24% of total capitalization.

With that in mind, I believe that CSX is attractive to buy at current levels. The company should be able to build upon its expected year-over-year volume growth in the second half of 2006. Prices are also increasing faster than fuel costs industrywide.

I believe CSX will continue to deliver double-digit annual earnings growth. With the support of the company's dividend and stock-buyback program, CSX shares could trade back up toward the mid-$30s over the coming quarters.

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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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