CSX Corp. (NYSE: CSX) has had a rough 2015, with its shares down about 25% year to date, but the company might have just caught a break. At least one analyst thinks so. Merrill Lynch added CSX to its US 1 list. The firm believes that CSX shares are attractive at 12 times its 2016 earnings per share (EPS) estimate of $2.20.
The firm remains encouraged by the company’s ongoing operational improvements, inflation plus pricing and ability to work around steep coal declines. Ultimately the firm maintained its Buy rating and $34 objective.
CSX continues to improve operations to counter volume declines. Quarter to date, the company has improved its velocity 1% and dwell time 6%, and it posted a 1400 basis points improvement year to date in on-time train origination.
In the report, the firm said:
The improving service has allowed it to begin culling excess locomotives and employees it brought on line to improve performance. It has furloughed 800 employees to-date, highlighting its move to improve service is generating significant results. To wit, management reiterated CSX’s target for a mid-60’s operating ratio (with the timeframe dependent on the stabilization of coal declines).
Merrill Lynch remains cautious, considering continued coal declines, particularly in export coal, which could pressure results. The company reiterated its target for flat third-quarter EPS, with a hint of caution given the coal declines, as well as its target for mid-single-digit EPS growth in 2015.
Looking forward, the firm targets minimal 1% revenue growth in 2016, after a 5% decline in 2015, as it expects coal declines will decelerate to -9% from -17%.
CSX replaces FedEx Corp. (NYSE: FDX) on the US 1 list.
Shares of CSX were essentially flat at $26.50 late Monday morning. The stock has a consensus analyst price target of $34.23 and a 52-week trading range of $24.47 to $37.99.
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