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3 Reasons CSX Stock Could Rise

By Dan Caplinger - Feb 29, 2016 at 2:23PM

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Railroads have fallen on hard times, but a rebound could be near. Find out why.

Image source: CSX.

Railroad giant CSX (CSX -0.21%) has suffered a big drop in its shares over the past year, falling more than 27% since Feb. 2015. Catastrophic conditions in the coal industry have played a major role in CSX's descent, and weakness in the energy sector has also contributed to its challenges. However, some things are still working in CSX's favor. Let's take a look at three of the biggest reasons why CSX stock could bounce back.

1. Natural gas prices have nowhere to go but up.
The drop in crude oil prices over the past year has been only part of the challenge that CSX has faced. Natural gas prices have also fallen to their lowest levels in more than a decade, fetching just $1.80 per million BTU. The reason why natural gas is such an important factor for CSX is that its low prices have spurred many utilities to make a transition from coal-fired plants to natural gas-fired plants in generating electricity. The timing couldn't have been worse for CSX and for the coal industry, because environmental regulations also gave utilities an incentive to switch from coal.

CSX has shifted away from its historical reliance on coal, and that could help it in the long run. For now, though, CSX has to hope that a bounce in natural gas will at least slow the pace of the transition away from coal-fired power plants. Relying on coal won't be a viable long-term strategy for CSX, but a little bit of good news could at least soften the blow in the near term.

2. A bounce in oil could drive new demand for crude shipments and fracking chemicals.
In order to replace its exposure to coal, CSX has looked to serve the domestic oil and gas industry. New sources of production from hydraulic fracturing and other modern recovery methods has contributed to the need for ways to get oil out of hard-to-reach shale areas, and CSX and peer Union Pacific (UNP 0.06%) have both worked hard to make oil an important part of their business. Moreover, the need for specialty chemicals and other products to assist in the fracking process has also created new business for CSX, Union Pacific, and their railroad peers.

Low oil prices have threatened production levels in many key areas. However, smaller oil and gas exploration and production companies have enough debt that they haven't been able to afford to slow their production even at lower prices, needing instead to accept rock-bottom prices just to produce enough cash to avoid default. If oil bounces, then production levels could move aggressively upward again, and that could in turn help CSX get more businesses from the oil fields.

3. Infrastructure investment should improve safety and boost volume.
Railroads are capital-intensive, and so CSX has to be smart about how it uses its cash. In its most recent quarterly conference call, CSX said that it intends to spend most of its capital budget in 2016 on upgrading its locomotive fleet. The move should help the company in its efforts to fight against the potential for derailments and other safety threats.

At the same time, CSX hopes to spend money on more direct growth initiatives. Three projects include boosting the throughput and efficiency of its intermodal business, traffic management to improve the flow of goods throughout CSX's network, and technology-related upgrades to make workers and equipment more productive. Longer-term spending could result in even greater growth when the economy returns to a more normal course, and that could boost CSX's prospects for share-price increases.

CSX investors have to be disappointed with the railroad's performance lately. If any of these three things start working in its favor, then CSX shares could finally give investors what they've wanted to see for a while.

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Stocks Mentioned

CSX Corporation Stock Quote
CSX Corporation
$29.06 (-0.21%) $0.06
Union Pacific Corporation Stock Quote
Union Pacific Corporation
$213.28 (0.06%) $0.13

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