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CSX CorporationCompany Valuation
Jay Graham, Avery Pagan, Tucker Hamlin Claire Hill, Michael Selfe
Max Eberhart
CSX is one of the largest freight rail transportation companies on the East Coast
• The company serves 23 states
• Reaches 2/3 of U.S. population
• 22,000 track miles and 70 distribution ports
• Freight portfolio includes: Commodities (agricultural,
industrial, automotive), Coal, and Intermodal
• 60% of industrial production
Company History2
CSX is slightly overvalued by the market at $29.50; we value it at $26 per share
Limited Competition
● With a duopolistic structure and high barriers to entry, the threat of new competitors is low
● CSX is at the top of the competitive market, putting them in a better position for long-term profitability
● The ability to adapt to changes in the domestic coal market, demand for exports, and emerging energy markets
Long-Term Profitability
Flexibility in Energy Markets
Valuation● Valuation based on conservative assumptions predicts a
slightly overvalued stock
Limited Competition – Long-Term Profitability – Flexibility in Energy Markets – Valuation 3
CSX is slightly overvalued by the market at $29.50; we value it at $26 per share
Limited Competition
● With a duopolistic structure and high barriers to entry, the threat of new competitors is low
● CSX is at the top of the competitive market, putting them in a better position for long-term profitability
● The ability to adapt to changes in the domestic coal market, demand for exports, and emerging energy markets
Long-Term Profitability
Flexibility in Energy Markets
Valuation● Valuation based on conservative assumptions predicts a
slightly overvalued stock
4
The railroad industry operates in a duopoly and CSX is part of the East Coast rail network
5
CSX Rail NetworkU.S. Rail Network
CSX and Norfolk Southern share similar key comparative metrics
Key Metric
Rail Area Covered > 21,000 miles > 21,000 miles
Number of Employees 30,000 28,500
Total Freight Volume 2014 (in thousands)
6,922 7,675
Number of Locomotives 4,257 4,265
6
Heavily prioritizing fuel efficiency and customer service, CSX is powered by principles
• National Gateway
• Pittsburgh Intermodal Rail
Terminal
• GenSets: new fleet of carbon-
efficient locomotives
• idle-reducing technologies:
APUs and AESS
7
483 Revenue Ton-Miles/Gallon
404 Revenue Ton-Miles/Gallon
With coal revenue decreasing, CSX is positioning itself to make a push towards intermodal transportation
8
CSX is slightly overvalued by the market at $29.50; we value it at $26 per share
Limited Competition
● With a duopolistic structure and high barriers to entry, the threat of new competitors is low
● CSX is at the top of the competitive market, putting them in a better position for long-term profitability
● The ability to adapt to changes in the domestic coal market, demand for exports, and emerging energy markets
Long-Term Profitability
Flexibility in Energy Markets
Valuation● Valuation based on conservative assumptions predicts a
slightly overvalued stock
9
We believe that CSX’s revenue will grow in the future by 7% YOY
10
CSX differentiates itself within the market by being the most time efficient freight transporter
11
Future growth of CSX is contingent on risk factors
• Natural occurrences, including severe weather
• Global economic conditions
• Legislation or regulatory changes and compliance risks, including environmental
regulations as a result of climate change
• Capacity constraints
12
CSX is slightly overvalued by the market at $29.50; we value it at $26 per share
Limited Competition
● With a duopolistic structure and high barriers to entry, the threat of new competitors is low
● CSX is at the top of the competitive market, putting them in a better position for long-term profitability
● The ability to adapt to changes in the domestic coal market, demand for exports, and emerging energy markets
Long-Term Profitability
Flexibility in Energy Markets
Valuation● Valuation based on conservative assumptions predicts a
slightly overvalued stock
13
Strategic Domestic Coal Realignment
• Domestic energy markets have dramatically shifted
• CSX has realigned its operations from the Central Appalachia region to the Illinois Basin
• The company continues to increase infrastructure through the additions of track and yard capacity
14
Increase in Coal Exports to developing economies
• CSX sees long-term growth in global demand as developing countries become more urbanized
• China and India are countries that are very depended on continuous shipments of U.S. coal
• The company has ready access to large U.S. coal suppliers and multiple port facilities
15
The Emergence of New Domestic Energy Markets
• A key driver for this has been the surge in shale drilling for the extraction of oil and natural gas
• These markets include: crude oil, liquefied petroleum gases (LPG), and other related materials
• CSX’s LPG market has expanded rapidly with increased investment in new operating capacity
16
CSX is slightly overvalued by the market at $29.50; we value it at $26 per share
Limited Competition
● With a duopolistic structure and high barriers to entry, the threat of new competitors is low
● CSX is at the top of the competitive market, putting them in a better position for long-term profitability
● The ability to adapt to changes in the domestic coal market, demand for exports, and emerging energy markets
Long-Term Profitability
Flexibility in Energy Markets
Valuation● Valuation based on conservative assumptions predicts a
slightly overvalued stock
17
We value CSX to be growing at a rate of 7% YOY
18
Common sized income statement with consistent growth
Common Sized Income Statement 2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
COGS 35.6% 34.4% 36.4% 35.9% 35.8% 35.7% 35.7% 35.7% 35.7% 35.7% 35.7%
Gross Margin 64.4% 65.6% 63.6% 64.1% 64.2% 64.3% 63.4% 63.4% 63.4% 63.4% 63.4%
SG&A 29.1% 27.8% 26.2% 25.7% 26.1% 26.7% 27.1% 27.1% 27.1% 27.1% 27.1%
Operating Margin 25.3% 28.9% 29.1% 29.4% 28.9% 28.5% 27.4% 27.4% 27.4% 27.4% 27.4%
Other Expenses 22.8% 23.1% 21.9% 22.6% 22.6% 22.4% 22.0% 22.0% 22.0% 22.0% 22.0%
Net Income 12.5% 14.7% 15.5% 15.8% 15.5% 15.2% 14.3% 14.3% 14.3% 14.3% 14.3%
19
We expect CSX to have a slow, yet steady, FCF increase
Year 2015E 2016E 2017E 2018E 2019E
Total Revenue $ 13,555 $ 14,504 $15,520 $16,606 $17,768
Expense (COGS) $4,707 $5,036 $5,389 $5,766 $6,170
Gross Profit (loss) $8,848 $9,467 $10,130 $10,839 $11,598
EBIT $4,091 $4,377 $4,684 $5,012 $5,363
EBIT * (1-tax rate) $2,585 $2,766 $2,960 $3,167 $3,389
Depreciation expense $1,205 $1,289 $1,379 $1,476 $1,579 Change in NWC $64 $68 $73 $78 $84
CAPX $2,440 $2,610 $2,793 $2,989 $3,198 Free Cash Flow $1,286 $1,377 $1,473 $1,576 $1,686
20
Tax Rate: 36.8% Terminal Growth Rate: 5% WACC: 9.42%
Slow and steady free cash flow leads to slightly overvalued stock
Terminal Value (millions) $40078
Enterprise Value (millions) $34115
Cash & Cash Equivalents (millions) $669
Debt (millions) $9514
Equity Value (millions) $25270
Number of Shares 983Value/Share $26
21
There are three major factors that can affect CSX’s share value
Optimistic Assumptions Base Pessimistic Assumptions
Annual Revenue Growth Rate 8.00% 7.00% 5.00%
Labor and Fringe 24.00% 26.20% 26.80%
Fuel 12.40% 12.50% 16.14%
WACC 8.86% 9.42% 10%
Value/share $39 $26 $11
22
CSX is slightly overvalued by the market at $29.50; we value it at $26 per share
Limited Competition
● With a duopolistic structure and high barriers to entry, the threat of new competitors is low
● CSX is at the top of the competitive market, putting them in a better position for long-term profitability
● The ability to adapt to changes in the domestic coal market, demand for exports, and emerging energy markets
Long-Term Profitability
Flexibility in Energy Markets
Valuation● Valuation based on conservative assumptions predicts a
slightly overvalued stock
Limited Competition – Long-Term Profitability – Flexibility in Energy Markets – Valuation 23
APPENDIX
24
Company History Slides
25
CEO – Mike Ward• Has been CEO since January of 2003• Also CEO for Dayton & Michigan Railroad
Co.• Has worked within the train industry since
graduation of Maryland• Took time off to obtain MBA from Harvard 26
Company Facts• CSX employees 32,000• 26,000 of those employees are unionized• Merchandise and intermodal market are
currently growing quicker than economy
27
2014 Revenue Breakdown• 12.7 Billion of revenue – driven by 3 lines of
business– Merchandise Business – 60% revenue, 42%
volume– Coal Business – 22% revenue, 18% volume
• About half of this coal goes towards electricity production (applies both domestically and internationally)
– Intermodal Business – 14% revenue, 40% volume
28
Limited Competition Slides
29
CSX Revenue By Cargo
30
CSX Revenue By Cargo
31
Sustainability Focus• CSX is very focused on increasing production and
profits – but only in a responsible manner• CSX has invested heavily in – Fuel efficiency initiatives – Cleaner facility technologies– And sustainable partnerships w/ conservation
organizations
3232
Long-Term Profitability Slides
33
P/E Ratio 2008 - Current
34
P/Cash Flow 2008 - Current
35
Price to Book Ratio 2008 - Current
36
Price / FCF 2008 - Current
37
EV / Sales Ratio 2008 - Current
38
EV / EBITDA 2008 - Current
39
Dividend Yield 2008 - Current
40
EV / EBIT Ratio 2008 - Current
41
Price/Share Ratio 2008 - Current
42
Energy Slides
43
Natural Gas Production by Source
44
U.S. Dry Shale Gas Production
45
Exports to India and China
46
The success of the railroad industry is dependent, in part, on the health of the crude oil industry
• In recent months, the crude oil market has been in steep decline
• In 2009 and 2010, the economy got better, causing the demand for crude oil to rise
• This created an arms race for crude oil• Since, we have seen the demand for crude oil fall as
the supply of crude oil has risen• As U.S. currency continues to rise and Asian currency
continues to fall, a downward pressure on price arises
47
Another driver of CSX is the health of the coal industry
• Coal is the cheapest (at 1/5 the price of other fuels) and most widely used fuel source for the generation of electricity
• Although it is the cheapest, it is also the least environmentally friendly fuel source
• There are four types of coal: lignite, sub-bituminous bituminous, and anthracite
• Coal is not a heavily traded commodity48
Valuation Slides
49
Income Statement
50
Projected Income Statement
51
Income Statement as Percent of Revenue
52
Assets
53
Liabilities
54
The analyst consensus rating of CSX is 3.87 out of 5
Consensus Rating 3.87
Buy 45.2% 14
Hold 54.8% 17
Sell 0.0% 0
12M Target Price 22/31 35.91
Last Price 30.24
Return Potential 18.70%
1 Year Return 4.3%
55
Analyst recommendations range in opinions, but have not yet slid into the ‘sell’ position
Neutral
Target Price: $34
Outperform
Target Price: $39
Hold
Hold
Target Price: $36
Market Perform
Target Price: $35
Buy
Target Price: $
Target Price: $
Market PerformTarget Price: $27
56