BMO Switches Tracks On CSX, Citing Lower Visibility

Railroad operator CSX Corporation CSX's fundamentals remain strong, but a not-so-attractive valuation has sent BMO Capital Markets to the sidelines.

The Analyst

Analyst Fadi Chamoun downgraded CSX from Outperform to Market Perform and raised the price target from $72 to $77.

The Thesis

CSX has the potential to achieve a 58-percent operating ratio over the medium term, as its transformation to a precision railroading model helps in achieving significant improvement in earnings and free cash flow, Chamoun said in a Wednesday note. (See his track record here.)

The operating ratio could improve further to 60 percent in 2020, the analyst said.

CSX has benefited from a strong demand cycle, including growing export coal volume and a robust domestic intermodal market, Chamoun said. 

BMO raised its third-quarter estimate for CSX, citing stronger volume. The sell-side firm raised 2018 EPS estimates from $3.58 to $3.64 and from $3.95 to $4.05 in 2019 due to projections of faster margin improvement.  

Visibility into the cyclical tailwinds that have supported CSX's earnings growth is now low, and the safety margin in the stock's valuation has "significantly moderated," rendering the risk-reward balanced, Chamoun said. 

The Price Action

CSX shares have gained about 38 percent year-to-date.

The stock was down 0.73 percent at $74.29 at the time of publication Wednesday.

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