Since celebrity value investors; such as Bill Gates and Warren Buffett, seem to love railways asking if railroads make money is a fair question. A great way to answer that question is to examine the railway that owns some America’s oldest track – the CSX Corporation (NYSE: CSX).
CSX is the largest rail operator in the Eastern United States; it is also the successor to some historic rail operators including; the Pennsylvania Railroad, the Seaboard Airline, the Baltimore and Ohio, and the New York Central. This puts CSX in a great position because it serves many of America’s largest cities including’ New York, Atlanta, Chicago, Tampa, Detroit, Cleveland, Philadelphia, Richmond, Pittsburgh, Buffalo, Columbus, Boston, and Miami, and 70 ports.
The history gives CSX control of some of the most valuable tracks in the United States; including routes between New York and Chicago, and Atlanta and Miami. That will remind some investors of Bill Gates’ favorite railroad; the Canadian National (NYSE: CNI) which also owns historic routes and serves ports.
Does CSX Corporation Make Money?
It is clear that CSX owns a lot of the most valuable railroad real estate in the United States. That real estate may soon become far more valuable because of highway congestion, growing international trade, and next-generation transportation solutions such as the Hyperloop.
Experienced value investors know that all means nothing if CSX does not make money today. Fortunately for value investors, ycharts data tells us that CSX is making some money right now.
Some evidence that CSX makes money includes:
- $1.785 billion in income on June 30, 2017. This was up from $1.722 billion in June 2016, but down from $1.995 billion in June 2015.
- $11.66 billion in revenues on June 30, 2017. This was up from $11.04 billion in revenues in June 2016, but down from $12.50 billion in revenues in June 2015.
- $1.097 billion in cash and short-term investments on June 30, 2017. This was an increase over $828 million in June 2016, but down from $1.118 billion in June 2015.
- $3.015 billion in cash from operations on June 30, 2017. This was down from $3.38 billion in June 2016, and $3.48 billion in June 2015.
- Assets of $35.86 billion on June 30, 2017. This figure has been growing; CSX reported $34.55 billion in assets in June 2016 and $33.75 billion in June 2015.
- An enterprise value of $58.97 billion on 21 September 2017.
Experienced investors will note that CSX has a lot of float for a railroad. The Norfolk Southern (NYSE: NSC) reported $642 million in cash and short-term investments on June 30, 2017.
Despite the float, CSX’s cash is limited it reported a free cash flow of $9 million on June 30, 2017. Like most railroads, CSX has high-operating expenses that offset the value of its assets. CSX’s assets are great because it owns a lot of real estate in expensive cities like New York and Boston.
CSX is a Good Value Investment
All this makes CSX a pretty good value investment because it is cheap right now. CSX shares were trading at $52.85 on September 18, 2017, and it reported a market capitalization of $48.27 billion on the same day.
More importantly, investors did make money at CSX. They received a 15.34% return on equity on June 30, 2017, and a dividend of 20¢ on August 29, 2017. That was a 2¢ increase over August 2016, when CSX paid an 18¢ a share dividend.
Such numbers and the potential of CSX’s real estate make it a good long-term value investment. It is certainly a bargain when compared to overpriced railroads such as the Canadian National.
CSX’s Future Looks Bright
The future looks bright for CSX because it serves some very fast-growing regions including Florida and North Carolina. It also owns a lot of land in crowded and congested cities such as New York and Miami.
Beyond that there’s the potential from the Hyperloop. The routes CSX controls would be perfect for that transportation system. It owns direct lines between New York and Chicago, and the old Sea Board Airline which runs from New York south all the way to Miami. Those routes and many others would be perfect for the Hyperloop.
Astute map readers might notice CSX’s existing track in Florida, is actually better positioned than the proposed Florida Hyperloop. That project, a winner in Hyperloop One’s Global Challenge, seems to run through an empty swamp. CSX’s track goes right through some of the Sunshine State’s major population centers; including Miami, Tampa, and Jacksonville, it also provides access to Orlando.
Another future opportunity for CSX is all the ports it controls. A big business in the future will be transshipment of cargo moving from Latin America to China, Latin America to Europe, or Europe to China. Shipments from South America might land at Miami and be shipped to the West Coast for transfer to ships bound for Shanghai for example.
So the CSX proves that a good understanding of history and geography can help rail investors make money. Warren Buffett and his good friend good Bill Gates understand that clearly.
Berkshire Hathaway (NYSE: BRK.H) owns the Burlington Northern Santa Fe which controls three transcontinental rail lines in the US. Gates’ Canadian National owns a line across Canada and another between Chicago and the Gulf of Mexico.
The geography makes CSX a value investment. Technology and international trade might make it a growth stock in the near future.