Lately, I have been exploring companies that should benefit the most from the continuing economic recovery and the various activities that go along with it. Examples of what will occur if the recovery continues include increased manufacturing and construction activity, and a sector that will benefit greatly from both is the transportation industry, specifically railroads. Having lived in the Southeast for my entire adult life, the railroad company whose operations I am most familiar with is CSX Corporation (NYSE:CSX), so we’ll start there and then see how they compare to some of their competitors.
CSX Corporation (NYSE:CSX)’s rail network is the largest in the eastern U.S., operating in 23 states and Canada with over 21,000 miles of track. The majority of the company’s revenue comes from four sources.Coal shipments account for 27% of CSX’s total revenue and mostly include deliveries to utility companies. Merchandise freight accounts for almost half of CSX Corporation (NYSE:CSX)’s revenues, and major products are chemicals, forest products, and metals. Automotive freight makes up another 10%, and the rest of CSX’s shipments are classified as “intermodal transport,” which means transporting freight using one container for a variety of shipping methods (rail, ship, truck), an example of which is shown below.
Growth and Valuation
While the economic recovery won’t necessarily help things like coal revenue, the merchandise freight business (CSX’s largest revenue stream) stands to benefit greatly, as most of what they ship has to do with the two things mentioned earlier: manufacturing and construction. Additionally, as a result of the recession, railroad companies have taken steps to improve the efficiency of their business, which has resulted in return on invested capital nearly doubling from 8.7% to 16.6% since 2005.
CSX Corporation (NYSE:CSX) trades for just 13.2 times TTM earnings, which sounds like a bargain, especially considering the recovery-driven earnings growth that is expected over the next few years. The company is expected to earn $1.78 per share this year, rising to $2.02 and $2.28 in 2014 and 2015, respectively, for annual earnings growth of 13.5% and 12.9%. Additionally, CSX has a great track record of increasing shareholder value through both dividends and buybacks. Shares currently yield 2.42% and the company has raised the payout consistently over the past several years. The company’s buyback program is even more impressive, with the total number of shares dropping by about 14% since 2009.