CSX

CSX Corp Dividend Stock Analysis

CSX Corp. (CSX) is the third largest publicly traded railroad company in North America. The company commands an impressive 21,000 miles of rail network. The following system map image demonstrates the scale and reach of CSX Corp. CSX Corp operates and services the east coast of the US and directly competes with Norfolk Southern (NSC). CSX Corp., however, has an advantage where it provides service to Florida, which NSC doesn’t.

CSX-SystemMap

The Railroad Industry

Railroads are considered a wide moat industry, as it entails immense capital requirements and new entrants in the industry are almost unheard of. Railroads are the pulse of the economy. Whether transporting crude, lumber, merchandise, agricultural or industrial products, railroads are what keeps the economy moving. Railroads are often closely observed by economists and analysts to get a sense of how the overall economy is doing. It is also considered a leading indicator for any recessions or slowdowns.

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Sector Challenges – Railroads

Over the course of past few months, I have been featuring the Sector Overview series, where I take a sector (or an industry) and provide some basic/background information about the sector. In addition, I present the major companies in the field and profile at a high level comparing the peers. These articles are supposed to be what the title claims – an overview. It is up to each investor to compare and contrast individual companies and decide which one to pick if needed. These articles have garnered a lot of attention from readers (Thank you once again 🙂 ) and the feedback really helps me in making this a better blog for more quality articles. Lately, I have been thinking on the other side of these investment opportunities and decided to highlight the sectors to present the threats and challenges in current environment. I begin this series with a Sector Overview Challenges – Railroads.

The article Sector Overview – Railroads is available here. In that article, I explored the idea of investing in the railroad sector and presented the major railroad operators in N.America – which includes Union Pacific Corp (UNP), Canadian National Railway Co (CNI/CNR.TO), CSX Corp (CSX), Canadian Pacific Railway Ltd (CP), Norfolk Southern Corp (NSC), and Kansas City Southern Inc (KSU). In addition, there is Burlington Santa Fe (BNSF), but the company was bought by Warren Buffet’s Berkshire Hathaway and taken private.

Caveat: Before I get into the details of the challenges faced by the sector, I would like to highlight that this is by no means a recommendation to short the stocks. Remember each investment carries risk, and all I am trying to do with this article is to try and highlight the existing risks in current market conditions and during this part of the economic cycle. These conditions may disappear in due time as the economy goes through its ups and downs.

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Sector Overview – Railroads

Fewer investments garner as much as attention to the pulse of the economy as the railroad sector. The railroads are considered a leading indicator for the overall health of the economy as transportation of goods is critical and gives investors a sense of how companies and consumers are spending their money. If we observe legendary investors such as Warren Buffett and Bill Gates – it is clear that they are fans of the railroad companies and believe in the long term prospects with Buffett’s Berkshire Hathaway buying out Burlington Santa Fe (BNSF), taking it private and Gates’ Cascade Investments holding a sizeable position in Canadian National Railway. Railroads are what we call a wide-moat industry sector – where it is extremely hard for new entrants to get established and challenge the incumbents. This makes the railroads very attractive for long term investors.

Whether transporting crude, lumber, merchandise, agricultural or industrial products, railroads are what keeps the economy moving. While the transportation for entities such as coal (which used to be the largest users of railroad services a few years ago) has fallen due to the fall in crude prices and rise of green energy alternatives, the transportation need for crude saw significant rise in the recent past. However, the recent turn of events with falling energy prices, has put a damper on crude transportation via railroads. The following chart from Association of American Railroads shows the trend in traffic for various payloads.

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CSX Corp Dividend Stock Analysis

CSX Corp (CSX) is the third largest railroad company in North America. The company operates 21,000 miles of network serving 23 states east of the Mississippi River including two Canadian provinces – Ontario and Quebec. CSX Corp operates in one of the widest moat industries – railroads. The company serves probably most important geographic region in North America – the eastern US, serving 2/3 of the population and over 60% of US industrial production. The company has a diversified traffic volume including intermodal, industrial, agricultural, construction and coal.

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