Research Paper on "Evaluating Financial Health"

Research Paper 7 pages (2390 words) Sources: 4

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CSX Financial Evaluation

Evaluating Financial Health: CSX Railroad

Among the country's largest railroads: Union Pacific, Norfolk Southern, Burlington Northern Santa Fe, and CSX, the latter has "rose the most since April 2009, leading gains among its rivals, after predicting record first-quarter earnings because of increased demand for container and merchandise shipments" (Doss, N. March 15, 2012. PP. 1). Increased commercial transport by railroad underscores a renaissance in an industry which had lost ground to trucking, but has now capitalized on its model of efficiency and connectivity to deliver value added service to customers. Railroads will continue to deliver streamlined supply chain logistics to companies seeking affordable and timely shipping options, and CSX is one of the best in breed in this space. The company's business model has generated a strong balance sheet and income statement, and has delivered quality returns for shareholders. Michael Ward the CSX CEO in the Annual Report of 2009 says "our role is to seize those opportunities by doing what we do best -- providing safe, efficient, and reliable transportation over a critical network that serves two thirds of the nation's population (CSX Annual Report 2009. PP. 4).

Company Background

"To be the safest, most progressive North American railroad, relentless in the pursuit of customer and employee excellence" (CSX.com. Mission Statement. 2012. PP. 1). CSX mission statement underscores a commitment to deliver value not only to its shareholders but to its key stakeholders. "A leader in freight rail transportation for more than 180 years, the Company's heritage dates back to the early nineteenth century when the Baltimore and Ohio Railroad Company ("B&O") -- the nation's first common carrier -- was chartered in 1827" (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 4). Over many decades the company has evolved and prospered; "through merger and consolidation bringing new geographical reach to valuable markets, gateways, cities, ports and transportation corridors" (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 4).

Financial Performance

As the nation's second largest rail carrier by revenue at 10.6 billion in 2010 (CNN Money.com. 2011. PP. 1), CSX Railroad has competently and adroitly maneuvered through the economic difficulties of the "Great Recession" and its aftermath. In 2011 the company's "transportation services generated $11.7 billion of revenue and served three primary lines of business: merchandise, coal, and intermodal" (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 3). Since 2007: revenue, operating income, and earnings per share have increased year over year with the exception of the peril of 2009. In order: revenues have expanded from 10.03 to 11.7 billion, operating income from 2.25 to 3.42 billion, and net earnings per share from 1.23 billion to 1.82 billion. Of concern to shareholders, earnings per share have also followed this upward trend, moving from $.95 to $1.68 over the same period (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 24).

Digging further into the numbers, the balance sheet has maintained its strong position with asset growth from 25.42 to 29.47 billion, while total liabilities have increased proportionally from 6.48 to 8.73 billion, reflecting strong capital expenditures to improve infrastructure and expand capacity (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 24). In 2011 as an example, "the Company invested $2.3 billion to further enhance the capacity, quality, safety and flexibility of its

Network" (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 26). Additionally, shareholder's equity has remained consistent as assets and liabilities have matured: 8.47 billion in 2011(CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 24). Cash flow is generated from operating activities: "In 2011, the Company generated $3.5 billion of cash from operating activities which represented a $230 million increase from prior year. In 2011, net cash used in investing activities was driven by $2.3 billion of property additions which increased $457 million from prior year" (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 42)

Lastly, there are two critical pieces of financial data which highlight the enduring strength of the company. First, the organization's operating ratio "A figure that shows the efficiency of a company's management by comparing operating expense to net sales" (Investopedia.com. 2012. PP. 1). From 2007 to 2011 CSX operating ratio has decreased from 77.6% to 70.9% (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 24); a reflection on management's ability to "generate profit" (Investopedia.com. 2012. PP. 1) across periods of uneven revenue. The second figure involves the company's dividend which has increased from $.18 to $.45 over the past five years (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 24); a demonstration of the firm's commitment to shareholders and their strong cash position.

Industry Overview and Trends

The railroad industry is in a time of strong growth and revitalization. "From 1980 to 2006, railroad fuel efficiency in the United States improved by 80%. Today railroads are three or more times as fuel efficient as highway trucks, and locomotives emit far fewer greenhouse gases than trucks per ton-mile of freight moved" (Samuels, J. 2008. PP. ). In particular, CSX "can move a ton of freight nearly 500 miles, on average, per gallon of diesel fuel… and each train can carry the load of 280 trucks" (CSX.com. Message from Chairman. 2012. PP. 1). The railroad story reflects a U.S. economy which maintains its resiliency and is poised for growth across industries and sectors. CEO Michael Ward articulates the belief that the rail resurgence will continue in the coming decades.

The economy is growing again, and more goods need to be moved. The population is on the rise, and more people will consume more things that travel by rail. And global trade creates even more demand for rail -- a key artery between American businesses and the country's bustling ports. (CSX.com. Message from Chairman. 2012. PP. 1)

Financial Comparison to Competitors

The CSX competition includes previously mentioned: Union Pacific, Norfolk Southern, and Burlington Northern Santa Fe. In terms of size and financial strength, CSX is nestled at 230 on the Fortune 500 in between rivals Union Pacific ranked 153 and Norfolk Southern at 261 respectively (CNNMoney.com. CSX. 2011. PP. 1). In terms of revenues, Union Pacific generated 16.9 billion in 2010, while Norfolk's 9.5 billion trailed CSX's 10.6 billion (CNNMoney.com. CSX. 2011. PP. 1). An alternatively useful method to measure competitor strength is earnings per share growth in the industry. By this metric CSX runs second to its rival Union Pacific with five-year EPS growth of 15.98% and 16.98% respectively. Norfolk Southern's EPS stood at a five-year average of 7.17% (CNBC.com. CSX Quote. March 19, 2012. PP. 1).

Additional financial comparisons show CSX meeting or exceeding industry benchmarks on: current ratio 1.09 (CSX) v. 1.22 (Industry), ROE 21.11 v. 1.00, ROA 7.57 v. 7.90, EBITDA 3.4 billion v. 1.5 billion, and Gross Profit Margin 58.5% v. 45%. CSX has produced quality and consistent financial metrics across its financial statements.

While competition in the industry is fierce, CSX highlights one company as its top challenger because of the geographic area in which it operates.

CSXT's primary rail competitor is Norfolk Southern Railway, which operates throughout much of the Company's territory…. A 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian

provinces of Ontario and Quebec. (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 5)

Policies and Strategies

CSX's three lines of business: merchandise, coal, and intermodal brought in revenues respectively of 54, 32, and 12% respectively in 2011 (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 3). Moving forward, CSX will continue to expand these core competencies to reflect continued domestic demand, growth in coal exports to meet surging global demand, and intermodal connectivity to deliver economic value. The company expects to continue its long-term investments in capacity expansion "with substantial job-producing infrastructure investments -- $8.3 billion in the past five years alone" (CSX.com. Message from Chairman. 2012. PP. 1). The continued growth of CSX will come from developing greater connectivity, expansion of lines beyond the eastern U.S., and "expansion of public-private partnerships such as National Gateway: an initiative which will increase intermodal capacity on key corridors between Mid-Atlantic ports and the Midwest"(CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 26).

On the expense side of the ledger, management's continued focus on reducing the operating ratio to 65% will deliver higher profits and margins (Morningstar.com. January 24, 2012. PP. 1) Over the coming fiscal years, these strategic opportunities will deliver shareholder value by "providing a foundation for volume growth and productivity improvement, enhanced customer service and continued advancements in the safety and reliability of operations" (CSX.com. 2011 Annual 10-K. December 30, 2011. PP. 26).

Conclusion

In 2009 Warren Buffett, the inimitable investor, purchased Burlington Northern Santa FE, and in so doing declared the strength of the U.S. railroad renaissance. "I just basically believe this country, you know, will prosper and you'll have more people moving more goods 10 and 20 and 30 years from now and the rails should benefit. it's a bet on the country, basically" (CNBC.com. Transcript. March… READ MORE

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