Industrial Select Sector

S&P 500

The Cannibal

Comparable Companies - CSX

The report covers a period with 1 discretionary insider purchase and 3 discretionary insider sales. The latest short interest data as of 2025-11-28 shows short interest at 1.8% of float with 2.3 days to cover. JPMORGAN CHASE & CO. is a significant institutional filer with a 5.5% stake.

PRESIDENT & CEO

EVP & CCO

SVP - CLO & CORP SECY

EVP - CD&TO

The securities were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of the issuer.

Stephen F. Angel

Joseph R. Hinrichs

Kevin S. Boone

Sean R. Pelkey

Michael A. Cory

Stephen Fortune

John J. Zillmer

Linda H. Riefler

David M. Moffett

Paul C. Hilal

J. Steven Whisler

Stephen F. Angel's career demonstrates a consistent focus on executive leadership within large industrial corporations, notably Praxair and CSX. His experience includes navigating significant corporate transactions like mergers and a strong emphasis on capital return to shareholders through aggressive share buybacks and dividends at CSX. This suggests a strategic approach centered on financial engineering and operational optimization to drive shareholder value.

Chief Executive Officer, President & Director

Joseph R. Hinrichs brings extensive operational leadership experience from the automotive industry (Ford) and the passenger rail sector (Amtrak) to his role at CSX. His career has been characterized by managing complex, large-scale operations, product development, and manufacturing. This background suggests a strong capability in driving efficiency and execution within a capital-intensive, logistics-focused environment.

Operational improvements and strategic initiatives at Ford

Executive Vice President & Chief Operations Officer

Kevin S. Boone's career trajectory from extensive financial roles at General Electric to CFO and now Chief Commercial Officer at CSX highlights a deep understanding of corporate finance and a growing strategic commercial acumen. His experience as CFO during a transformative period at CSX, coupled with his long tenure in finance, suggests a strong analytical capability and a strategic perspective on how financial health underpins commercial success.

Financial oversight and capital management at CSX

Executive Vice President & Chief Commercial Officer

Sean R. Pelkey's career demonstrates a deep specialization in financial control and reporting, developed through extensive experience at General Electric and his progression within CSX's finance department. As CFO, he is responsible for the company's financial health, integrity of its reporting, and compliance, suggesting a meticulous and detail-oriented approach to financial management.

Oversight of financial reporting and controls at CSX

Executive Vice President & Chief Financial Officer

Michael A. Cory's career is deeply entrenched in the operational aspects of the railroad industry, with substantial experience at Canadian National Railway and a clear progression within CSX. His expertise lies in the day-to-day management and optimization of rail networks, suggesting a hands-on approach to driving operational performance and efficiency, which is critical for a company like CSX.

Executive Vice President & Chief Operating Officer

Stephen Fortune's career is defined by a focus on leveraging technology and digital innovation to drive business transformation. His experience at General Electric and his subsequent roles at CSX, culminating in his current position as Chief Digital & Technology Officer, indicate a strategic understanding of how technology can be a key enabler of operational efficiency, competitive advantage, and future growth in complex industries like transportation.

Technology transformation initiatives at CSX

Executive Vice President, Chief Digital & Technology Officer

John J. Zillmer's extensive experience as a CEO and Chairman in the industrial sector, particularly at AK Steel, provides him with a strong foundation for his role as Chair of the Board at CSX. His leadership history suggests a focus on strategic direction, corporate governance, and navigating the complexities of industrial operations, which are valuable assets in overseeing a company like CSX.

Leadership and strategic direction at AK Steel

Chair of the Board

Linda H. Riefler's expertise in human capital management and her current role chairing the Governance and Sustainability Committee at CSX highlight her focus on the critical non-financial aspects of corporate performance. Her background at Morgan Stanley suggests a sophisticated understanding of talent strategy, organizational development, and the increasing importance of ESG factors in corporate value creation.

Chair of Governance and Sustainability Committee

David M. Moffett's extensive background in financial services, including his tenure as CEO of Freddie Mac during a major financial crisis, provides him with a unique perspective on risk management and financial stability. As Chair of the Audit Committee at CSX, his deep expertise in finance, accounting, and regulatory matters is critical for ensuring the integrity of financial reporting and robust internal controls.

Navigating financial crisis at Freddie Mac

Chair of the Audit Committee

Paul C. Hilal's career is characterized by a deep involvement in activist investing and a strategic focus on unlocking shareholder value. His experience founding Mantle Ridge LP and his prior role at Pershing Square Capital Management provide him with a unique perspective on corporate governance and capital allocation. His significant ownership stake and role on the Executive Committee at CSX underscore his influence and commitment to driving strategic and financial performance.

Member of the Executive Committee

J. Steven Whisler's extensive experience as a CEO and Chairman in the industrial sector, particularly at Phelps Dodge, provides him with a deep understanding of operational management and corporate strategy. His current role on the Audit Committee at CSX leverages this experience for robust financial oversight and governance, ensuring the integrity of the company's financial reporting and risk management practices.

Member of the Audit Committee

Ann D. Begeman

James L. Wainscott

Suzanne M. Vautrinot

Steven T. Halverson

Anne H. Chow

Thomas P. Bostick

Union Pacific operates as a single-segment Class I railroad, providing freight transportation services across a 32,000-mile network in the western two-thirds of the United States. The company hauls bulk, industrial, automotive, and intermodal freight, leveraging its integrated network to drive operational efficiency and service reliability.

The Railroad, along with its subsidiaries and rail affiliates, is the company's one reportable operating segment. It provides and analyzes revenues by commodity group but treats the financial results as one segment due to the integrated nature of the rail network.

Norfolk Southern is a leading Class I railroad operator providing freight transportation across a 20-state network in the eastern United States. Its service portfolio includes intermodal, carload, and industrial and consumer merchandise, serving a diverse customer base.

The company operates as a single reportable segment, with its financial results reflecting the integrated nature of its rail network.

CPKC is the only single-line rail network connecting Canada, the U.S., and Mexico. It provides a broad range of freight services, including bulk, industrial, merchandise, and intermodal transportation, leveraging its unique transcontinental network.

The company operates as a single reportable segment, reflecting the integrated nature of its North American rail network.

CNI operates a unique, truly transcontinental network spanning from Canada's Atlantic Coast to Canada's Pacific Coast and the U.S. Gulf Coast. It hauls a diverse mix of commodities, including grain, coal, petroleum, chemicals, metals, forest products, and intermodal freight.

The company's rail-based transportation services are reported as a single operating segment due to the integrated nature of the network.

The company's properties primarily consist of track and related infrastructure, locomotives, and freight cars and equipment. The CSXT rail network serves 26 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec, with total track miles greater than 20,000 route miles. The company owns and leases approximately 3,500 locomotives.

CSX is led by a highly experienced management team that is executing a clear, albeit risky, strategy to engineer per-share value creation through aggressive share repurchases while funding a transformative, multi-year infrastructure investment program. The team's external track record (Angel at Praxair) and the board's deep industry expertise provide confidence in their ability to navigate the industry cycle. However, the current capital allocation strategy is pro-cyclical, increasing leverage while investing heavily at a time of deteriorating operational efficiency. While the buyback execution has been tactically strong, the financial engineering masks underlying margin compression and value-destructive incremental investment. The team is skilled, but the strategy prioritizes short-term EPS accretion over balance sheet strength and near-term returns.

The Company is subject to environmental laws and regulations that may result in significant costs. Potential operational impacts from climate-related risks include changing weather patterns that could impact the Company's network or assets. Proposed and adopted laws and regulations on federal, state, and local levels include restrictions, caps, taxes, or other controls on emissions. These regulations could adversely affect operations by reducing coal-fired electricity generation and consumption, increasing fuel and capital costs, and making it difficult for customers to produce products competitively. The Company is a party to various proceedings related to environmental issues and has been identified as a potentially responsible party at approximately 230 environmentally impaired sites under CERCLA (Superfund Law).

As of December 31, 2024, the Company employed approximately 23,400 full-time employees. Approximately 22% of the overall workforce and 35% of management were diverse (calculated as the percentage of males of color and all females). The FRA Personal Injury Frequency Index was 1.19 in 2024 and 0.94 in 2023.

The Company's Code of Ethics serves as a guiding standard for ethical behavior and covers matters including discrimination, harassment, and safety. The Company is subject to wide-ranging federal, state, provincial, and local environmental laws and regulations concerning the handling, storage, use, generation, transportation, and disposal of waste and other materials. The Company is subject to allegations or findings that it has violated environmental laws, which can result in fines, penalties, or cleanup costs.

This narrative is built upon a deteriorating financial backdrop where revenue has declined for two consecutive years (down 0.8% in FY 2024) and operating margins have compressed by 180 basis points to 36.1%, driven by lower coal pricing, rising labor costs, and network disruptions from the very projects meant to secure the future.

The stated CapEx strategy is focused on three pillars: safety, reliability, and growth. The Q4 2024 transcript specifies that the 2025 CapEx budget will be roughly flat to 2024, excluding hurricane recovery spend, but will be elevated due to the Blue Ridge subdivision rebuild (expected to exceed $400 million) and the Howard Street Tunnel project. The P14 Innovation Dossier confirms that CapEx is primarily classified as 'Capacity Expansion' to increase the utility of assets and expand network capacity for long-term growth.

The asset base is dominated by core railroad infrastructure. The 10-K discloses a $150 million impairment on Quality Carriers' goodwill and intangible assets. The P14 Innovation Dossier notes that planned capital investments for 2025 include additional costs to rebuild the Blue Ridge subdivision, which will further increase the value of Net PP&E.

The low ROIC is consistent with a heavy investment cycle where new assets are not yet generating returns. The P14 Innovation Dossier and Part 3.2 analysis show that CapEx is focused on long-term capacity expansion (Blue Ridge, Howard Street Tunnel). These projects are not expected to contribute to earnings until after 2026.

JPMORGAN CHASE & CO.

Price / Tangible Book Value

EV / Normalized EBITDA

EV / EBITDA

EV/EBITDA

P/Tangible Book Value

Retired CEO of AK Steel; extensive leadership in manufacturing and industrial sectors; expertise in corporate governance and human capital management.

Current CEO and President of CSX; previously CEO of Praxair; extensive executive leadership experience.

Retired Chief Talent Officer of Morgan Stanley; expertise in human capital, compensation, and finance.

Former CEO of Federal Home Loan Mortgage Corporation (Freddie Mac); expertise in finance, accounting, and risk management.

Founder and CEO of Mantle Ridge LP; significant capital allocation and investment expertise.

Retired CEO of Phelps Dodge Corporation; extensive experience in mining and industrial materials; deep regulatory knowledge.

Former Acting Chairman of the Surface Transportation Board; extensive government and regulatory affairs expertise.

Retired Chairman, President and CEO of AK Steel Holding Corporation; expertise in manufacturing and human capital.

President of Kilovolt Consulting (cybersecurity); retired Major General, U.S. Air Force; expertise in technology and cybersecurity.

Former CEO of The Haskell Company; expertise in construction, operations, and finance.

Retired CEO of AT&T Business; expertise in technology, cybersecurity, and human capital management.

CEO of Bostick Global Strategies; retired Lt. General, U.S. Army; expertise in engineering, government, and operations.

Michael Burns

CEO: 6x base salary; EVPs: 3x base salary; SVPs: 1x base salary. Must be achieved within 5 years.

Donna M. Alvarado

Diana Sorfleet

CSX Corporation, based in Jacksonville, Florida, is one of the nation's leading transportation companies. The company provides freight transportation services across its rail network, which links the northeast, including New England and the New York metropolitan area, with Chicago, midwestern markets, and the Southeast. CSX serves four primary lines of business: merchandise, intermodal, coal, and trucking. The company's history dates back nearly 200 years, originating with The Baltimore and Ohio Railroad Company.

The Rail segment includes the activities of all CSX entities other than the trucking company, Quality Carriers, and also includes the company's equity in the net income of equity method investments. This segment represents the core railroad operations, which are analyzed as one operating segment due to the integrated nature of the rail network.

The Trucking segment consists of the operations of Quality Carriers, which is the largest provider of bulk liquid chemicals truck transportation in North America. This segment is not material for separate disclosure as a reportable segment.

Held WACC (10.0%) and Terminal Growth (2.5%) constant, and solved for the margin required to justify the current market valuation.

Balance Sheet - Supplemental

Balance Sheet

Cash Flow Statement - Supplemental

Cash Flow Statement

Income Statement - Supplemental

Income Statement

Ratios

Valuation

Historical Ratios & Multiples - CSX

The railroad industry is facing a 'lower-for-longer' cyclical downturn in coal and a soft industrial production environment. While intermodal volume is growing (up 4% for CSX), it is being offset by a 20% decline in coal revenue. The industry is in a Peak Capital Cycle, with peers like CNI already signaling CapEx reductions for 2026, while CSX remains committed to elevated spending.

CSX is relevant for analysis now because it is at a strategic crossroads, with a new CEO executing a high-risk infrastructure ramp while the stock trades near 52-week highs despite deteriorating margins.

Completion of the Howard Street Tunnel and Blue Ridge Subdivision projects. This is the primary event that must validate the current reinvestment thesis by restoring network fluidity and unlocking double-stack capacity.

A pivot in capital allocation toward debt repayment. If management halts buybacks to de-lever the balance sheet, it would signal a shift from financial engineering to fundamental stabilization.

Lower-for-longer cyclical downturn in coal and industrial demand. A prolonged period of weak commodity pricing would impair the company's ability to fund its CapEx program and debt service, leading to a liquidity crunch.

Execution risk and cost overruns on major capital projects. The Blue Ridge and Howard Street projects are already seeing cost estimates rise (Blue Ridge now >$400M), and further delays would extend network disruptions.

CSX Corporation's current tangible asset base, as of December 31, 2024, encompasses an extensive rail network of approximately 35,539 total track miles, which includes main-line track, other mainline track, terminals, switching yards, and passing sidings and turnouts. The company also owns or long-term leases a significant fleet of over 3,500 locomotives, with an average age of 25 years, and over 64,000 units of rail equipment, including 45,197 freight cars and 18,907 containers. Complementing these are various buildings, other structures, work equipment, and land. Recent strategic investments, such as the completion of the Howard Street Tunnel and Blue Ridge Subdivision projects, have further enhanced the network's capacity and resiliency. The acquisition of Pan Am Systems in June 2022 also added $600 million in properties and equipment to the asset base.

CSX's acquisition of Pan Am Systems, Inc., which included $600 million in properties and equipment.

Sale of a 'Blue carded EMD SD 40-2' used locomotive.

Cash & Equivalents

Accounts Receivable

CSX's inventory, primarily composed of specialized railroad maintenance parts and bulk fuel, presents a mixed profile for liquidation. The healthy inventory turnover of 18.18 times per year indicates that the stock is generally current and in active use, which is a favorable factor for recovery. For the commodity portion (fuel), a liquidation would likely involve sales at wholesale prices, potentially with a discount for bulk and speed, as wholesale fuel is inherently cheaper than retail. The specialized maintenance parts, while critical for railroad operations, would likely find buyers among other railroads or specialized service providers, albeit at a discount reflecting the liquidation context. The overall blended recovery rates applied across the scenarios consider these factors, balancing the intrinsic value and demand for operational supplies against the pressures of an orderly liquidation. The base case recovery of 55.0% is a realistic reflection of these dynamics, while the high and low cases capture the potential variability based on market conditions and buyer motivation.

Inventory

Short-Term Inv.

Other Current Assets

**Primary Transaction Comps:**
- CSX's acquisition of Pan Am Systems, Inc., which included $600 million in properties and equipment. (N/A (Blended value for a business acquisition))
- Sale of a 'Blue carded EMD SD 40-2' used locomotive. ($225,000.00 USD per unit)

**Replacement/Scrap Data:**
New railroad track construction costs typically range from $1 million to $4 million per mile, with some estimates around $2.5 million per mile, excluding bridges, tunnels, and culverts. Replacement costs for track infrastructure are estimated between $2 million and $5 million per mile. Industrial land with rail access has been observed to sell for $20,000 to $112,383 per acre, depending on location and specific features.

Net PP&E

Intangibles

Long-Term Inv.

Other Non-Current

Accounts Payable

Current Debt

Tax Liabilities

Other Current Liabilities

Non-Current Debt

Other Non-Current Liabilities

CSX Corp. announced Q3 2024 operating income of $1.35 billion and net earnings of $894 million ($0.46 per diluted share).

CSX price target lowered to $40 from $41 at RBC Capital

CSX price target raised to $30 from $27 at Morgan Stanley

CSX price target raised to $40 from $39 at Baird

CSX price target raised to $45 from $44 at UBS

CSX upgraded to Overweight from Equal Weight at Wells Fargo

CSX upgraded to Outperform from Sector Perform at RBC Capital

CSX price target raised to $44 from $38 at Baird

CSX is currently a Peak Earnings Trap masquerading as a turnaround story. While management pursues a Cannibal strategy-returning 61.6% of total cash uses to shareholders and reducing share count by 18.6%-the underlying business is eroding. Operating margins have compressed from a 40.6% peak in 2022 to 32.0% today, and incremental ROIC has plummeted to -52.8%. The market is incorrectly pricing a successful recovery from disruptive infrastructure projects, while we see a Peak Capital Cycle where massive CapEx is being deployed into a softening demand environment, creating a significant valuation overhang.

Executive Summary

The primary value driver is a projected operational mean-reversion that we believe is fundamentally flawed due to a peak capital cycle. The catalyst for a downward re-rating will be the realization that the $2.5 billion annual CapEx program is failing to offset structural labor inflation and coal pricing headwinds. While the asset base is vast, the current $19.0 billion net debt load and $0.00 net liquidation value provide no tangible margin of safety at current prices.<ul><li>Driver: Structural margin compression and value-destructive reinvestment.</li><li>Catalyst: Failure of the 2026 infrastructure ramp to deliver projected efficiency gains.</li><li>Protection: A high-quality but leveraged asset base with 20,000 route miles.</li></ul>Our variant perception is that the market is extrapolating current trough earnings into perpetuity, incorrectly pricing the stock as a business on the verge of a cyclical inflection. In contrast, our analysis of supply-side discipline and leading indicators suggests that the industry is in a Peak Capital Cycle, where CSX is aggressively adding capacity (CapEx at 175.7% of depreciation) into a softening demand environment. The market views the Howard Street Tunnel and Blue Ridge projects as transformative catalysts; we view them as high-risk, disruptive expenditures that are currently destroying value, as evidenced by a negative incremental ROIC of -52.8%.This is a mid-term, cyclical trade designed to capture the downside from a peak valuation to a mid-cycle normalization, as the market realizes the current financial engineering cannot mask deteriorating operational fundamentals.

Core Investment Rationale

CSX operates a premier rail network in the Eastern United States, serving 23 states and two Canadian provinces. The business model is built on the high barriers to entry inherent in owning 19,500 route miles of track. Revenue is generated through four primary segments: Merchandise (flat YoY), Intermodal (up 4% on volume), Coal (down 11% on pricing), and Trucking. Management is currently executing a strategy focused on three pillars: safety, service, and cost control. However, the financial reality is a shift toward heavy reinvestment. The company is sacrificing short-term free cash flow to fund the Howard Street Tunnel and Blue Ridge Subdivision projects, which are intended to unlock double-stack clearance and network resiliency by 2026. Simultaneously, CSX is aggressively shrinking its equity base through share repurchases, which have consumed $14.8 billion in capital since 2020.The core assets of CSX are its operational leverage and its dominant cost position in the Eastern US rail corridor. The company owns and leases approximately 3,500 locomotives and maintains a network of 30 intermodal terminals. These assets provide significant scale, but their utility is currently constrained by major infrastructure projects. The Howard Street Tunnel is a critical bottleneck being addressed to allow double-stack container trains, while the Blue Ridge Subdivision is undergoing a $400 million+ rebuild following hurricane damage. These assets are capital-intensive, requiring $2.46 billion in FY 2024 CapEx to maintain and expand.CSX operates in a rational, oligopolistic industry alongside Tier 1 rivals Union Pacific (UNP), Norfolk Southern (NSC), Canadian Pacific Kansas City (CP), and Canadian National (CNI). While the industry structure is stable, CSX has become the high-cost operator. Its TTM operating margin of 32.0% significantly lags the peer median of 46.0%. Competitors like CNI (52.8% margin) and CP (51.4% margin) demonstrate superior unit economics, suggesting that CSX's structural cost advantage is eroding relative to its closest peers.Over the last full business cycle, CSX transitioned from the efficiency-obsessed era of Precision Scheduled Railroading (PSR) to a more growth-oriented, but capital-heavy, 'ONE CSX' culture. During the 2022 peak, the company achieved operating margins of 40.6% and generated $3.7 billion in free cash flow. However, as the cycle turned, capital allocation shifted aggressively toward financial engineering. Currently, the company is navigating a leadership transition and operational distress. Stephen F. Angel took the CEO role in 2021, bringing a track record of industrial consolidation from Praxair. Under his tenure, the company has prioritized buybacks ($14.8 billion) over balance sheet de-risking, even as net debt rose to $17.57 billion. The defining context today is the presence of activist investor Paul Hilal (Mantle Ridge) on the board, which has ensured a focus on shareholder returns but has not yet arrested the decline in core operational metrics like network dwell time, which increased 10% in FY 2024.

Business & Situation

<ul><li>Bull Case: The completion of the Howard Street Tunnel in 2026 unlocks double-stack clearance, driving a step-change in intermodal volume and pricing power. Management's aggressive buyback program ($14.8B since 2020) continues to engineer EPS growth despite flat net income, providing a floor for the stock price.</li><li>Bear Case: CSX is a high-cost operator in a peak capital cycle, with operating margins (32.0%) lagging peers (46.0%) and incremental ROIC (-52.8%) indicating massive value destruction. High leverage ($19.0B net debt) and a $0.00 net liquidation value leave the equity vulnerable if the 2026 infrastructure payoff fails to materialize.</li></ul>The consensus view is that CSX is at an earnings trough, with operational disruptions and coal pricing headwinds masking a powerful recovery. The market is pricing in a 'Moderate Buy' based on the expectation that the 2026 completion of major infrastructure projects will restore margins to historical 40%+ levels and that the 'Cannibal' buyback strategy will protect per-share value in the interim.The railroad industry is facing a 'lower-for-longer' cyclical downturn in coal and a soft industrial production environment. While intermodal volume is growing (up 4% for CSX), it is being offset by a 20% decline in coal revenue. The industry is in a Peak Capital Cycle, with peers like CNI already signaling CapEx reductions for 2026, while CSX remains committed to elevated spending.Our differentiated view is that the market is underestimating the structural nature of CSX's margin decay. The 140 basis point contraction in operating margin to 36.1% in FY 2024 was not just a cyclical blip; it was accompanied by a 10% increase in network dwell time, signaling a breakdown in operational execution. Furthermore, the presence of activist Paul Hilal and the aggressive buyback program have created a pro-cyclical leverage trap. By spending $14.8 billion on buybacks while net debt increased to $17.57 billion, management has reduced financial flexibility exactly when it is needed most to navigate a disruptive reinvestment cycle. The governance friction, while intended to prevent value drift, has instead incentivized financial engineering over operational stabilization.We conclude that the risk/reward is heavily skewed to the downside. The market is paying for a 2026 recovery that is far from certain, while ignoring the current value destruction (IncrROIC -52.8%) and the lack of a valuation floor.Our analytical edge is a more granular analysis of industry supply-side discipline, which suggests the coming upcycle will be weaker and more capital-intensive than the market is currently pricing into trough multiples. We have identified a significant disconnect between management's efficiency narrative and the quantitative reality of deteriorating network KPIs.

Core Thesis

CEO Stephen F. Angel has a proven track record of managing industrial cycles, most notably at Praxair where he orchestrated the merger with Linde AG. However, his tenure at CSX has been defined by a 'Cannibal' strategy that prioritizes buybacks over operational stability. While he is a skilled strategist, he is currently overseeing a period where incremental investments are destroying value (ROIC 5.0%).Management demonstrates skill in tactical buyback execution, with a positive Trade ROI in 16 of the last 20 quarters. However, the overall skill is marred by pro-cyclicality; they have allocated $14.8 billion to buybacks (47.4% of cash uses) while allowing net debt to rise to $17.57 billion. M&A effectiveness is poor at 0.5x, following the $886 million spent on acquisitions like Quality Carriers.Management's credibility is strained. In transcripts, they emphasize 'efficiency gains' and 'cost control,' yet FY 2024 saw a 140 basis point operating margin decline and a 10% increase in network dwell time. This 'Say vs. Do' gap suggests operational challenges are more deep-seated than acknowledged.<ul><li>Board Independence: 92% (11 of 12 directors)</li><li>Chairman/CEO Roles: Separate (John J. Zillmer is Chair)</li><li>Chairman Tenure: 2 Years</li><li>Insider Ownership: 3.03% (Institutional: 73.98%)</li><li>Shareholder Rights: Declassified Board, Majority Voting, No Poison Pill</li></ul>Stewardship is currently in a high-stakes 'Reset' phase. The Governance Outcome Tree is as follows: 1. Status Quo: Management continues the high-buyback, high-CapEx strategy, leading to further margin pressure if the 2026 ramp fails. 2. Compromise: The board, influenced by Paul Hilal, pivots to prioritize debt reduction and operational stabilization over buybacks. 3. Reset: Continued operational misses lead to a leadership change or a strategic review of non-core assets like the Trucking segment. The presence of Mantle Ridge ensures the stock will not stay cheap forever, but it also increases the risk of pro-cyclical financial engineering.

Leadership & Governance

The valuation floor is derived from the historical trough Price-to-Tangible-Book multiple of 1.6x applied to the current tangible book value per share of $6.69. This is lower than the Bear Case DCF value of $20.73, providing the ultimate cyclical floor.The base case assumes a gradual recovery in operating margins to 38.0% by Year 5, with revenue growth normalizing at 2.5%. This reflects a successful but slow payoff from infrastructure projects, offset by persistent labor inflation.The bull case assumes the Howard Street Tunnel completion drives a 5.0% revenue acceleration and margins expand to 41.0%. The P19 Bull Value of $47.31 represents the Blue-Sky Potential.The Bear Case Fair Value is $0.00. Under a distressed framework, the Net Liquidation Value (NLV) of $0.00 (where $30.5B in adjusted liabilities exceeds $28.1B in adjusted assets) acts as the floor, as the company survives the trough but the equity is wiped out in a severe credit event scenario.

Valuation Context

<ul><li>Completion of the Howard Street Tunnel and Blue Ridge Subdivision projects. This is the primary event that must validate the current reinvestment thesis by restoring network fluidity and unlocking double-stack capacity.</li><li>A pivot in capital allocation toward debt repayment. If management halts buybacks to de-lever the balance sheet, it would signal a shift from financial engineering to fundamental stabilization.</li></ul>CSX is relevant for analysis now because it is at a strategic crossroads, with a new CEO executing a high-risk infrastructure ramp while the stock trades near 52-week highs despite deteriorating margins.

Catalyst Path & Context

<ul><li>Lower-for-longer cyclical downturn in coal and industrial demand. A prolonged period of weak commodity pricing would impair the company's ability to fund its CapEx program and debt service, leading to a liquidity crunch. Coal revenue declined 20% in Q4 2024, and TTM revenue is down 3.8%.</li><li>Execution risk and cost overruns on major capital projects. The Blue Ridge and Howard Street projects are already seeing cost estimates rise (Blue Ridge now >$400M), and further delays would extend network disruptions. Network dwell time increased 10% in FY 2024, indicating ongoing disruption.</li></ul>

Primary Risks

<ul><li>Entry Target: N/A</li><li>Stop Loss: N/A</li><li>Position Size: Sizing reflects a 'None' posture as the current valuation offers no margin of safety and the expected return is deeply negative (-21.6%).</li><li>Time Horizon: N/A</li></ul><ul><li>Network dwell time and trip plan compliance trends</li><li>Quarterly CapEx spend vs. original project estimates</li><li>Net Debt/EBITDA leverage ratio</li></ul>Evidence that the 2026 infrastructure completion does not lead to an immediate and sustained expansion in operating margins above 38%.

Actionable Parameters & Monitoring

CSX is a Cyclical Operator currently trapped in a peak capital cycle, where aggressive financial engineering is failing to mask structural operational decay. With operating margins lagging peers by 1,400 basis points and a negative incremental ROIC of -52.8%, the company is destroying value to fund a speculative 2026 recovery. We recommend a Sell with a Fair Value Target of 28.64, representing 21.6% downside from current levels.

Final Conclusion

Structural margin compression and value-destructive reinvestment.

Driver

Failure of the 2026 infrastructure ramp to deliver projected efficiency gains.

Catalyst

A high-quality but leveraged asset base with 20,000 route miles.

Protection

The completion of the Howard Street Tunnel in 2026 unlocks double-stack clearance, driving a step-change in intermodal volume and pricing power. Management's aggressive buyback program ($14.8B since 2020) continues to engineer EPS growth despite flat net income, providing a floor for the stock price.

Bull Case

CSX is a high-cost operator in a peak capital cycle, with operating margins (32.0%) lagging peers (46.0%) and incremental ROIC (-52.8%) indicating massive value destruction. High leverage ($19.0B net debt) and a $0.00 net liquidation value leave the equity vulnerable if the 2026 infrastructure payoff fails to materialize.

Bear Case

CSX is currently a Peak Earnings Trap masquerading as a turnaround story. While management pursues a Cannibal strategy-returning 61.6% of total cash uses to shareholders and reducing share count by 18.6%-the underlying business is eroding. Operating margins have compressed from a 40.6% peak in 2022 to 32.0% today, and incremental ROIC has plummeted to -52.8%. The market is incorrectly pricing a successful recovery from disruptive infrastructure projects, while we see a Peak Capital Cycle where massive CapEx is being deployed into a softening demand environment, creating a significant valuation overhang.

The narrative has shifted from a focus on operational efficiency and cost control under the 'ONE CSX' culture in 2023 and early 2024 to a transformative phase driven by major capital projects and leadership change in late 2024/2025. The company moved from mitigating external headwinds (commodity prices, bridge collapse) to executing a high-stakes infrastructure overhaul (Howard Street Tunnel, Blue Ridge) to unlock future capacity, culminating in a new CEO declaring a vision to be the 'best performing railroad in North America' with a focus on capital efficiency and safety.

Method	Implied Value	Weight	Weighted Value
DCF	$32.18	55%	$17.70
Comps	$23.83	35%	$8.34
Historicals	$26.02	10%	$2.60
Total Weighted			$28.64

CSX

Price History

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Valuation Table