Barclays Cuts CSX To Hold On Coal Outlook, Limited 2015 Growth

Shares of CSX (CSX) were slipping Thursday afternoon, after an analyst downgrade citing lack of catalysts for the railroad giant.

Barclays' Brandon Oglenski and Keith Mori cut their rating on the stock from Overweight to Equal Weight and lowered their target price by $2 to $30. They write that while CSX is still the cheapest in the sector, they see marginal upside for the stock given a limited growth outlook in 2015. They also note that a difficult start to 2014 implies further headwinds, as CSX's cost and margin performance has lagged peers in recent periods, and "efficiency gains could be masked in the near-term as the network regains fluidity."

Their downgrade also relates to dynamics in the coal industry:

CSX shareholders have sustained a volatile ride in the past two years, dominated by the loss of nearly $800mm in coal revenue. Dynamics have improved in the near term for domestic coal consumption, but pending environmental regulations and soft export markets make for a difficult long-term outlook. Based on our analysis of future headwinds, we estimate coal revenues could decline a further $380 to $500mm in the coming years. We are encouraged at CSX's pace of expansion beyond coal markets, which has totaled nearly $1bn in additional revenue or 12% of growth in two years. However, growth has been insufficient to create favorable earnings outcomes given coal's relatively high profitability. Beyond the near term, coal headwinds signal another slow growth year in 2015, driving our downgrade to Equal Weight.

EPA regulations and soft exports drive negative long-term view on coal – We estimate a further 16% reduction in domestic coal for CSX through 2018, based on analysis with our Power and Utilities team surrounding pending (Mercury and Air Toxics) MATs rules. Further, U.S. export tonnage is expected to decline 30% through 2015, creating an aggregate coal headwind of $380mm to $500mm. With coal representing an outsized profit relative to other businesses, we expect material earnings headwinds as a result.

Oglenski and Mori also cut their price target on Norfolk Southern (NSC) by $1 to $100, a reflection of their trimmed earnings forecasts, also related to their outlook for coal. They rate Norfolk Southern at Equal Weight.