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Here's Why Investors Should Hold on to CSX Stock Currently

CSX Corporation’s CSX measures to reward its shareholders, even in this uncertain scenario, are encouraging. Upbeat coal revenues and liquidity represent other tailwinds. However, intermodal woes and high operating costs represent major challenges.

Let’s delve deep.

Factors Favoring CSX

CSX’s top line is benefiting from higher export coal volumes, domestic intermodal shipments and volume growth as well as pricing gains. Evidently, coal revenues increased 36% in 2022 driven by strength in export coal. High export coal prices and fuel surcharge revenues are expected to bolster the top line in the near term.

The company’s commitment to reward its shareholders is encouraging. In February 2023, the company announced a 10% hike in its quarterly dividend to 11 cents per share. In 2022, CSX rewarded shareholders roughly $5,583 million through buybacks ($4,731 million) and dividends ($852 million). In the first nine months of 2023, CSX bought back shares worth $2,901 million and paid dividends worth $666 million.

The company’s cash and cash equivalents were pegged at $1,439 million at the end of third-quarter 2023, much higher than the current debt of $559 million, implying that the company has sufficient cash to meet its current debt obligations. Moreover, CSX's current ratio (a measure of liquidity) at the end of the third quarter of 2023 was pinned at 1.15, higher than the comparable figure of 0.90 for its industry.

Key Risks

CSX’s operations are being hurt by supply chain disruptions, including labor and equipment shortages. Weakness in the merchandise segment due to semiconductor shortage is concerning. In the first nine months of 2023, intermodal revenues declined 13% year over year.

High costs due to increases in labor and fringe expenses, purchased services and other, and fuel expenses are limiting CSX’s bottom line. In 2021, total expenses rose 11% year over year due to 12%, 24% and 69% increases in labor and fringe, purchased services and other, and fuel costs, respectively. In 2022, operating expenses increased 27% year over year, mainly due to the 78% rise in fuel expenses. The increase in fuel costs was due to the steep rise in highway diesel fuel prices as well as the addition of non-locomotive fuel used for trucking. Despite CSX's cost-saving approach, operating expenses increased 2% year over year in the third quarter of 2023.

CSX’s high capital expenditures may further impede its bottom line. During 2021, the company’s capital expenditures were $1.79 billion, higher than $1.63 billion in 2020. For 2022, capital expenses were $2.1 billion. For 2023, capex is expected to be approximately $2.3 billion. High capex may also hurt the company's free cash flow generating ability.

Zacks Rank & Key Picks

CSX currently carries a Zacks Rank #3 (Hold).

Investors interested in the Zacks Transportation sector may consider some better-ranked stocks like Air Canada ACDVF and SkyWest SKYW.

Air Canada currently sports a Zacks Rank #1 (Strong Buy). An uptick in passenger traffic is aiding ACDVF. Recently, management announced plans to launch a year-round route between Montreal and Madrid. You can see the complete list of today’s Zacks #1 Rank stocks here.

The service will commence in May of the following year as part of its expanded international summer 2024 flying schedule to cater to increased demand. The Zacks Consensus Estimate for current-year earnings has jumped 32.6% in the past 60 days.

SkyWest currently carries a Zacks Rank #2 (Buy). SKYW's fleet modernization efforts are commendable. Initiatives to reward its shareholders also bode well. The Zacks Consensus Estimate for current-quarter earnings has surged 83.3% in the past 60 days.

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