Railroad Operator CSX on Track to Deliver Long-Term Profits

NEW YORK (TheStreet) -- Before the interstate system revolutionized how major cities and states were connected, the backbone of commerce was railroads. Times have changed, but that hasn't changed the value of CSX  (CSX), the biggest railroad operator in the eastern U.S.

Declining coal demand caused by a shift to cheaper natural gas is still a challenge to CSX's business, but the company has emerged through the worst periods of weak volume with margins that have begun to expand. This makes CSX, which competes with industry leader Union Pacific  (UNP), a name to watch.

So ahead of the company's first-quarter earnings results Tuesday, now's the time to buy, especially with shares down 7% on the year. And at 17 times earnings, compared with an average price to earnings ratio of 21 for stocks in the S&P 500  (SPX) index, CSX shares look like a tremendous bargain. Shares, at $33, are down nearly 9% for the year to date but are up 18% for the past 52 weeks.

Headquartered in Jacksonville, Fla., CSX's rail network transports products from a diverse range of industries, including chemicals, metals and minerals. But its bread and butter comes from transporting containers from trucks over its tracks, known as "intermodal" shipping. This makes up 40% of its rail volume. Its benefits include lower fuel costs and higher freight density. Also, the company is able to pack more freight per transport adds to the efficiency it can gain per delivery since it minimizes waste.

This positive impact has been realized in the company's recent results, including earning a profit in the past eight quarters. In the last four quarters, profits have increased by an average of 5% year over year, including a 23% surge in its fourth quarter.

The company is also benefiting from higher volumes, which climbed 6% year over year in the fourth quarter, helping generate a 5% year-over-year jump in revenue, reaching $3.19 billion. Not surprisingly, the volume growth was led by the intermodal business, which climbed 5% year over year to 1.76 million tonnes (metric ton). For that matter, the entire business continues to show moderate improvements.

Assuming the pricing in the rail industry remains favorable and CSX can generate better volume growth in its merchandise segments, CSX has the making of a solid bounce-back candidate in the second half of 2015.

For the quarter that ended March, earnings are projected to be 45 cents per share on revenue of $3.05 billion, making year-over-year increases of 12.5% and 1%, respectively. For the full year, ending in December, earnings are projected to climb 10% to $2.12 per share, while revenue of $12.77 billion would signal a 1% increase.

With the company still investing almost $2.5 billion each year, looking for ways to better serve its customers, CSX said in March that it is on track to grow 2015 earnings by double-digits. This confidence has yet to be reflected in the stock price, which is still down for the year. Still, this is a company with a 64-cent annual dividend, yielding 2%.

CSX knows how to create value and deserves a higher stock price.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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