What CSX Corp. Can Tell Us About Economic Improvement

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CSX Corp. (NYSE:CSX) is one of the companies I look to in order to get a feel for how the economy is really operating. Sorry, government reports, you are not always to be trusted. The reason is because CSX is close to industry and business, as it provides rail-based transportation services in North America.

It has a business model that allows investors to better understand what is happening in the overall market. Sure, we can look to the performance of the SPDR S&P 500 ETF (NYSEArca:SPY) to get a feel for how companies are doing, but this just tracks the stock. A company like CSX is in the thick of things, and its performance can give an indication of the health of the economy.

The company offers traditional rail services and transports intermodal containers and trailers. The company transports crushed stone, sand and gravel, metal, phosphate, fertilizer, food, consumer, agricultural, automotive, paper, and chemical products; and coal, coke, and iron ore to electricity-generating power plants, steel manufacturers, industrial plants, and deep-water port facilities.

As you can see, this crosses many sectors. It also provides intermodal transportation services through a network of approximately 50 terminals transporting manufactured consumer goods in containers in the eastern United States, as well as performs drayage services, including pickup and delivery of intermodal shipments and trucking dispatch services. In addition, the company operates various distribution centers and storage locations. It also connects non-rail-served customers through transferring products from rail to trucks, such as ethanol and minerals.

Further, it is involved in the acquisition, development, sale, lease, and management of real estate properties. The company’s reach is significant. It operates an approximately 21,000-route-mile rail network, which serves various population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec, as well as operates approximately 4,000 locomotives.

The company saw second-quarter net earnings of $529 million, or 53 cents per share, up from $521 million, or 51 cents per share in the same quarter of 2013. That is moderate improvement and reflects a slowly growing economy. For the quarter, the company’s revenue increased 7 percent to an all-time record $3.2 billion on volume growth of 8 percent, with strength across CSX’s major markets.

The higher revenues helped deliver record operating income of nearly $1 billion and an operating ratio of 69.3 percent. The importance of this statement cannot be understated. Record operating income for a stock that can help us gauge economic activity. This bodes well for the markets moving forward and could mean the SPDR S&P 500 ETF could move higher soon.

So what can you do with the stock? I think it is actually attractively priced. In addition to the apparent positive economic environment, secular growth trends in the oil and gas markets are contributing to CSX’s expectation for modest full-year earnings growth in 2014. The company should see double-digit earnings growth and margin expansion for its shareholders beginning in 2015. The company also expects to sustain a mid-60s operating ratio longer term.

The company is also taking steps to grow. It has increased this year’s capital investment around approximately $100 million. This will help key infrastructure improvements and will add freight cars to help drive long-term growth. On the whole, the stock is performing well and the company suggests things may actually be improving. As such, I think the stock is a good long-term buy on weakness.

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Disclosure: Christopher F. Davis holds no position in CSX Corp. and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $36 price target.

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