CSX Valuation A Bit Off Track; BMO Lowers To Market Perform

While CSX Corporation CSX's medium-term outlook looks “favorable,” the company may witness some pressures in the near term, BMO Capital Markets’ Fadi Chamoun said in a report. He downgraded the rating on CSX from Outperform to Market Perform following the recent run-up in shares.

Chamoun mentioned that the share price appreciation on strong Q3 results renders “the risk/reward in the stock more balanced.” The price target has been raised from $34 to $35.

Growth Outlook

“Excluding the coal segment, CSX's volumes have increased at a pace slightly exceeding GDP growth over the past five years,” Chamoun pointed out. He added that volume had been driven mainly by the intermodal segment. While this segment could continue to contribute, the coal market may become less challenging moving head.

The analyst added that CSX should be able to grow earnings even without volume growth if pricing growth “continues to track around the rate of cost inflation (high likelihood).” The company faces significant opportunities to improve productivity and its execution capabilities seemed to have improved.

“We expect that capital spending could moderate as a result of excess locomotive capacity and declining PTC related spending in the coming several years. The combination of lower capital intensity and improving operating margins implies higher ROIC, which is positive for valuation,” Chamoun wrote.