Analysts Split On CSX's Outlook Post Q2 Earnings

What impact will the death of fossil fuels have on CSX Corporation CSX?

CSX's CEO Hunter Harrison said during the company's second-quarter conference call that "fossil fuels are dead" — which implies the company won't invest in new coal-related assets, Loop Capital Markets' Rick Paterson commented in a research report. The executive happens to be "exactly right" and is the first railroad CEO to both "state the obvious" and "tie it so explicitly" to capital allocation decisions. It is also difficult to see upside in CSX's stock, especially after a sell-off in reaction to the earnings report, Paterson continued. In fact, the company is just four months into a four-year transition, but it appears investors aren't buying into the long-term story.

Argus: Further Upside Ahead

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Looking forward to 2020, the last year of Harrison's contract, the analyst is now modeling a 59 percent operating ratio assumption. This marks a more than a 1,000-basis-point improvement from last year's 70 percent, but yet again, investors don't seem to be impressed. However, this may be attributed to the "key man risk" that Harrison's tenure as CEO will only last a few years, and his long-term transformation plan is "incomplete."

"The bottom line is that Q2 may be a taste of what's to come in future quarters, which is highly scrutinized stellar performance required to primarily justify the gains the are already in the stock," the analyst concluded.

Shares remain Hold rated but with a price target boosted from $52 to $54, implying limited to no upside moving forward.

CSX's CEO Harrison has "wood to chop" at CSX, but he is up to the task, Argus' John Eade said in a research report.

Harrison boasts the necessary experience and knowledge in turning around railroads and is targeting "substantial improvement" in efficiencies and earnings over the coming years, the analyst noted. Helping the executive's mission is a recovery in the commodity and construction segments, along with the domestic intermodal business, which is showing "solid" growth.

Despite an 83-percent surge in the stock over the past year, investors haven't missed the boat, Eade emphasized. The analyst is modeling CSX's 2017 earnings per share to now be $2.31 which is higher than his prior estimate of $2.28 and implies a 27 percent growth for the year and $2.80 per share in 2018. Meanwhile, shares trading at 18.6x projected 2018 earnings, above the stock's midpoint of its five-year range of 10–22, but also trading at a discount based on price/sales and price/cash flow metrics.

Shares remain Buy rated with a price target boosted from $58 to $60, but the analyst's dividend discount model yields a fair value above $70 per share.