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%

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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

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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

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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 

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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

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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

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