CSX: Back On Track?

Need that Labor Day breather? So did CSX Corporation CSX.

The railroad operator closed out August with a heavy backlog of shipments, disrupting supply chains from coal to food production and forcing time-constrained clients to seek alternative transport services, according to the Wall Street Journal. Clients like McDonald’s Corporation MCD and Kellogg Company K had begun to supplement standard train shipments with truck deliveries.

But CSX was ready to capitalize on the holiday weekend. In fact, CEO Hunter Harrison considered Labor Day an operational pivot point, allowing him time to strategize after pulling 900 locomotives and cutting 2,300 employees.

“[L]ong weekends are a struggling railroad's best friend,” Loop Capital analyst Rick Paterson wrote in a Tuesday note, explaining that fewer customers allows the operation of fewer trains and the opportunity to regroup. “Three days of reduced customer activity rather than two could actually make a material difference as CSX attempts to ‘catch up.’”

What’s Likely To Be Seen

Heading into the weekend, Paterson gleaned optimism from stability in average train speeds and improvements to terminal dwell figures. The number of cars that had not moved in 48 hours had decreased from a peak of 63,000 four weeks ago to 56,000 two weeks ago.

The analyst advised to wait for another week of data before considering it an inflection and to actually look to the second week of September as indicative of a self-sustaining turnaround.

“In terms of judging success or failure, what's ‘normal’ is for the operational data to show a small sequential erosion from the prior, shortened, week, but still be better than the weeks prior to Labor Day, with improvements then accelerating from there, which essentially matches Mr. Harrison's quote,” Paterson wrote. “And if all this fails? Thanksgiving isn't all that far away.”

Loop maintains a $54 price target on CSX considering risks of fuel cost increases and the government’s failure to reform corporate taxes and increase infrastructure spending.

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