CSX Corp (CSX)

Make most of their money shipping coal. With Nat gas going down it is not doing well.

Prefers Union Pacific (UNP-N) in the US, and Canadian Pacific (CP-T) in Canada. There is not much difference between the 2 Canadian rails, but CP is trading a little cheaper. Union Pacific is trading at 16X. The trouble with the Eastern rails is that they are shorter hauls. Efficiencies in rails come with longer hauls. All US rails are beset with coal. Intermodal is where they have tried to grow the business.

(Market Call Minute.) A little more exposed to coal, which is a negative. Operationally they have done a very good job bringing down their operating ratios.

A $25 billion company operating through 23 US states. Rails and transports led to the downside in the correction that started last March/April. Transports have made a nice turn and are behaving much better. Canadian rails have had great rallies off the lows, and are behaving quite well. If you think energy prices can remain relatively low, truckers can be competition to rails. Thinks there are some headwinds. This looks okay, but he would prefer Canadian National (CNR-T) which gets north/south traffic, and the shares have behaved much better. Financials look very strong and they are going to grow their earnings 13% this year and probably 10% next year.

Chart shows this was in an uptrend from 2013. Once it stopped making higher highs and higher lows in early 2015, it broke down. Now we are getting a series of lower highs and lower lows. Right now this is in a downtrend.

This has been a really tough part of the market. For the Eastern rails in particular there is the coal exposure. With natural gas prices as low as they are, there was a 15% decline in coal volume last year, and another 20% this year. This quarter has guided really weak, and then improving from there. Has cost initiatives that they still have to get down. Right now this is a tough place to be. Looking forward to infrastructure that the rails have, especially at this time with how much they have pulled back, she is still Long the stock.

The chart shows a classic topping breakdown. It touched the rising trend line over and over again, and then topped. Broke down through the neck line at around $31, and then fell down. It tried a countertrend rally which didn’t work. The next support level should be at around $17-$18.

A switch into anything might be a good idea. He would prefer an ETF into mid cap banks. Crystallize the loss.

Rails have been beaten up pretty badly. There might be fundamentals that come around as some point in time, but you want to see the charts confirm that fundamental picture. This rail is over indexed to coal, the energy complex, and commodities in general are pretty much in tatters and not showing signs of life. There are definitely better places with lower risk.

Have been a tough play in both Canada and the US. The commodity cycle is a big part of it. They are talking about weakness in more and more of their businesses. Prefers UNP-N.

He would hold onto rail stocks. He thinks you will see core consolidation in the industry. CSX-T is the cheapest in the group so would be interesting as a target. There are worse places you could put your money.

The US rails have come off because of commodity exposure. Coal is one of CSX’s main ones. CNR-T is the best managed railway in North America and have the best ratios. CP-T is challenging that.

The earnings growth of both Canadian rails has been better than this one’s. It is not trading super expensive, trading around 14.5-15 times earnings, but its growth rate over the next couple of years is high single digits. Whereas you get into a CNR or a CP which have double digit earnings growth.

Railroads have very strong periods of seasonality. They tend to bottom right around the middle of October, and then move strongly higher right through until early January. You then have a period of time where they take a break into February, and then have another move from late February through until May. Chart shows this is clearly in a downward trend, but seems to be trying to base out at the current levels. Be patient. We are into a base building period right now. Any kind of weakness down to its recent lows is really an opportunity to be a buyer for seasonal trade, at least until January of next year.

Have about 20% coal exposure and their operating ratio is closer to 70. If he were going to go into this area, he would be looking at Union Pacific (UNP-N).