CSX Corp

Class I railroad CSX's second-quarter revenue surged 10% year over year on solid intermodal growth, stronger merchandise carload activity across most segments, and higher fuel surcharges. Profitability showed additional year-over-year progress.

Why it matters: CSX's margins lagged peers in 2025 due to disruption and costs associated with two large infrastructure projects. With those projects largely behind, the firm's operating margin has inflected upward in recent quarters. CSX's adjusted operating ratio (expenses/revenue; lower is better) improved to 61.7% from 64.1% thanks to revenue growth, the absence of project disruption, and successful efficiency initiatives over the past year. For the full year, management now expects adjusted margin gains of "greater than" 350 basis points (previously 200-300 basis points). This implies an adjusted OR near 63.3%, better than our previous 63.9% forecast.

Between the lines: Intermodal volume jumped 9% on good Class I service over the past few years (save for slight recent deterioration), along with tightening capacity and rapidly rising rates (including fuel) across the competing truckload industry. Rising truckload rates boost intermodal's value proposition.

The bottom line: We expect to raise our discounted cash flow-derived $37 fair value estimate for wide-moat CSX by 3%-5% due mostly to boosting our medium-term revenue forecasts on better-than-expected intermodal volume recovery. After rallying this year on merger speculation, rebounding intermodal demand (including recovering truckload rates), and hints of an industrial sector recovery, the shares look slightly rich relative to our long-term free cash flow forecasts. CSX was modestly undervalued in the first half of 2025. Valuation aside, nascent intermodal service options should continue to drive incremental truck-to-rail conversion opportunities for intermodal in the year ahead, and we anticipate demand improvement in several key industrial end markets.

BLANK PAGE

Following second-quarter results, we are raising our DCF-derived fair value estimate for CSX to $39 per share, from $37, due mostly to boosting our medium-term revenue forecasts on better-than-expected intermodal volume recovery.

Of note, we consider CSX to be a takeout candidate following Union Pacific's agreement to acquire Norfolk Southern. In short, we think that deal puts pressure on BNSF to consider a tie-up with CSX to compete effectively. That said, our fair value estimate reflects CSX's prospects as a stand-alone entity.

Several crosscurrents were at play in 2024, translating into a 1% revenue decline. Total yield fell 3% on lower benchmark coal prices, mix headwinds, and domestic intermodal pricing pressure from depressed truckload sector rates. Consolidated volume grew 2% on an international intermodal rebound and new business development. International container activity benefited from spiking US imports rooted in a pull-forward ahead of a potential port strike and tariffs. On the other hand, US industrial end markets remained sluggish, and coal plummeted on low natural gas prices and slower exports. CSX's adjusted OR deteriorated 70 basis points to 63.2% due to wage inflation, yield pressure, and fourth-quarter hurricane-related network disruption.

Revenue declined 3% in 2025, driven by all-in yield declines stemming from lower fuel surcharges, depressed benchmark coal pricing, and intermodal rate pressure (persistently low truckload rates). That said, core pricing on merchandise carloads remained positive. Because of tariff action, industrial end markets remained sluggish in 2025, constraining carload growth despite CSX's healthy new business pipeline. Carload activity fell 2% due to the soft housing sector and continued lackluster US industrial production. Also, coal declined due to a customer facility outage and lower export activity. On the other hand, intermodal volumes rose 3.5% thanks to shippers pulling forward imports ahead of tariffs, coupled with market share gains and higher truck-to-rail conversions supported by enhanced service offerings.

CSX's margins faced pressure on numerous fronts in 2025, including sluggish carloads, weak benchmark coal pricing, lower intermodal pricing, and two large infrastructure projects (including expansion of the Howard Street Tunnel). As a result, total adjusted OR deteriorated to 66.8% from 63.2%.

For 2026, assuming tariffs or an oil shock don't spark an economic pullback, we expect the US industrial sector to see modest improvement for carloads (along with new business development tailwinds) and truck-to-rail conversions to remain strong for intermodal. We also expect improvement in intermodal contract pricing as rates recover in the competing truckload sector. Overall, we model 6% revenue growth in 2026, driven by spiking fuel surcharges, higher volume (especially intermodal), and incremental core pricing gains. We look for 4% revenue growth in 2027, reflecting modest industrial end market improvement, benefits from new business wins, and stable intermodal demand.

On the margin front, we look for adjusted OR improvement to 63.2% in 2026 as several cost headwinds abate, with incremental improvement to 61.9% in 2027 on continued efficiency efforts and stronger revenue growth. We assume CSX's OR peaks at 61.0%-61.5% this freight cycle. Our model bakes in low-single-digit average annual declines in domestic coal carloads long term (flattish for export coal).

In our view, each of the North American Class I railroads we cover, including CSX, enjoys a wide economic moat rooted in cost advantages and efficient scale. Core pricing and margin resilience in past freight recessions and in the face of substantial coal volume losses over the past decade-plus are a testament to the rails' robust competitive positioning. With near certainty, we expect the rails to continue to turn their two core moat sources into economic profit for the next 10 years, and more likely than not, 20 years from now.

Cost advantage is a key factor in CSX's wide moat. While barges, ocean liners, aircraft, and trucks also haul freight, railroads are by far the low-cost option when no waterway connects the origin and destination, especially for freight with low value per unit weight (bulk commodities). Along those lines, railroads enjoy roughly quadruple the fuel efficiency of trucking per ton-mile of freight, and through greater railcar capacity and train length, rails make more effective use of locomotive assets and manpower despite the need for train yard personnel. Rails can also carry significantly more freight at once. We estimate railroads enjoy a 10%-30% discount to trucking on similar lanes (on average). Marine shipping by barge is less costly than rail for certain bulk commodity shippers that are located near the inland waterways, offering access to the desired destination. However, customers in a position to ship via barge already do so, thus removing any threats barging could pose to current railroad volume. Even for intermodal container freight, which consists largely of consumer-related products, rail has historically been cheaper than its key competitor, truckload shipping, on average over the cycle, thanks to rail’s aforementioned fuel efficiency and more economical use of labor.

Route density plays a role in rail’s cost advantage relative to a would-be new railroad entrant in a given corridor. We don’t expect any new mainlines to be built, but the incumbent Class I providers would enjoy vastly lower unit and marginal costs than an upstart, given immense network/lane density. The existing six North American Class I railroads have thousands of customers across myriad end markets and geographies that drive significant freight volume across their networks.

In addition to cost advantage, the Class I railroads benefit from efficient scale. Would-be rational competitors have scant incentive to enter because massive upfront infrastructure costs and the potential for creating excess capacity amid limited demand would preclude economic profit and destroy value. The network of tracks and assets that US Class I railroads have in place is essentially impossible to replicate. CSX's network spans the densely populated Eastern US, capturing approximately half of the carload volume in the region.

Would-be entrants are fended off by the steep barrier to entry formed by the need to obtain contiguous rights of way on which to lay continuously welded steel rail spanning a significant portion of North America. Railroads occasionally build new spurs, but we anticipate no new mainlines will be built, given the massive barriers to entry.

Efficient scale followed industry consolidation that was escalated by the 1980 Staggers Rail Act, which permitted extensive rail line sales, abandonment, and combination while allowing for private contracts and rate setting based on market demand. In 1980, more than 40 Class I rails operated across North America, and today there are only six (by definition, a Class I rail generates at least $475 million of annual revenue). Consequently, a single railroad often serves an end-of-the-line shipper, only two railroads operate in most regions, and the rails have been able to reinvest while becoming quite profitable. In fact, we suspect that, barring government intervention, the rational number of competitors on the continent would be two, via additional consolidation. This is because in most regions, customers already have only two capable providers that service the market efficiently.

Intermodal shipping should enjoy favorable long-term trends, including secular constraints on truckload capacity expansion and shippers' efforts to minimize transportation costs through mode conversions (truck to rail).

Network service levels have remained healthy in recent years, especially relative to the lackluster performance in 2021 and 2022.

With help from the PSR playbook, CSX's adjusted OR improved to 58.1% in 2022 from 66.5% in 2017. Despite setbacks over the past few years, we expect CSX to rekindle OR gains over the medium term.

Union contract wage and benefit inflation will remain a partial margin headwind over the near term.

The STB oversees railroads’ pricing, so there will always be underlying risk of reregulation in terms of a policy shift to a more heavy-handed approach.

Domestic utility coal volume will probably see near-term headwinds from lower relative natural gas prices and elevated inventories.