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What CSX Management Sees Ahead for 2016

By Dan Caplinger - Jan 25, 2016 at 1:11PM

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The railroad still sees some big positive opportunities ahead, but can it reach them?

Image source: CSX.

Railroad giant CSX (CSX 0.56%) has continued to struggle after releasing its fourth-quarter financial results earlier this month, and investors aren't sure whether the railroad's future direction will reward its shareholders in the long run. Yet even though CSX CEO Michael Ward and his executive team acknowledged the difficulties it faces, the railroad still thinks it can outpace Norfolk Southern (NSC 0.63%) and other peers with its unique set of opportunities.

Let's take a closer look at what CSX's leaders had to say.

"Over the past five years, CSX has transformed its business to continue delivering solid results despite the global energy transition." -- CEO Michael Ward

In the past, railroads like CSX and Norfolk Southern depended heavily on transporting coal to energy-hungry utility customers and other buyers. In recent years, though, the drop in natural gas prices has made coal less attractive to utilities, so the need for coal shipments has fallen dramatically.

Ward is pleased with CSX's ability to adapt to changing conditions in energy, citing the fact that the railroad has overcome large declines in coal-related revenue by diversifying its mix of services to embrace other industries in place of coal. Moreover, with service improvements and longer-term growth investments, CSX has managed to cut its coal exposure by more than a third in just four years. Coal now represents less than a fifth of CSX's revenue, and although it's still important, CSX seems prepared for whatever happens to the market in the future.

"Looking forward, we expect volume to decline in the first quarter. We expect a challenging freight environment to continue as the headwinds associated with coal, low commodity prices, and a strong U.S. dollar more than offset the markets that will show growth." -- CFO Frank Lonegro

As 2016 begins, CSX unfortunately doesn't see a quick rebound. In addition to energy, the railroad also foresees difficulty in the agricultural products arena because of low corn prices and a strong dollar. Chemicals and metals will also likely see substantial declines.

Not every area will do badly. CSX has high hopes for growth in the automotive area, and it believes highway and nonresidential construction will help boost its minerals segment. Intermodal will likely come in flat as international challenges offset domestic growth. Still, the tepid performance companywide will necessitate continuing diligence to keep costs under control.

"Our ex-coal pricing actually improved from the third quarter. ... All-in went down, and there really is a reflection of what we did in the export coal market." -- Chief Sales & Marketing Officer Fredrik Eliasson

Pricing has been a key component of keeping CSX profitable, and the company has stayed disciplined in most of its markets. The exception has been in shipping coal for export, where the company hasn't suffered the same fuel-surcharge-related declines in revenue, and therefore identified it as an opportunity to gain market share by being flexible on pricing. CSX hopes it can use its available capacity to generate profitable business without sacrificing too much of its margins, and in a weak market, that's been vital for CSX's customers.

"Looking at our capital allocation for 2016, you can see that over half the investment will be used to maintain infrastructure to help ensure a safe and fluid network." -- Lonegro

Safety has been a prime concern for CSX, Norfolk Southern, and other railroads, especially with the higher volume of crude-oil-transporting trains and the potential for dangerous derailments. Lonegro said most of CSX's spending for the year will be on upgrades to its locomotive fleet, with the company expecting 100 new locomotives in 2016.

However, CSX will also look for growth opportunities. The company set its highest priority on its intermodal business, on ways to make traffic along its rail network flow more smoothly, and on technology-related innovations to boost productivity. Although CSX will also spend money on implementing positive train control requirements, it will spend about $300 million in 2016 on the project, compared to the $1.5 billion it has spent in past years.

"There haven't been any mergers under the current regulatory environment." -- Ward

Consolidation in the railroad industry has been under discussion for years, with Norfolk Southern engaged in a takeover battle with Canadian Pacific. Ward was careful in addressing a question about the merger, noting he believes the Surface Transportation Board of the Department of Transportation will focus on the public interest of any merger as well as any secondary impacts on shipping markets. Beyond that, the unanswered question is whether divestitures would be required in approving any merger in the industry.

CSX continues to face challenges, but it's working hard to overcome them. The comments from its leaders show that the railroad has high hopes of emerging on top of the industry in 2016 and beyond.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends CSX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

CSX Corporation Stock Quote
CSX Corporation
$34.35 (0.56%) $0.19
Norfolk Southern Corporation Stock Quote
Norfolk Southern Corporation
$261.84 (0.63%) $1.63

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