RBC Capital Markets analyst Walter Spracklin upgraded his rating on Jacksonville-based CSX Corp. from “sector perform” to “outperform,” saying in a Sept. 18 research report, “the stock is well positioned under virtually all consolidation scenarios.”
The July merger agreement between Norfolk Southern Corp., and Union Pacific Corp. to create a transcontinental railroad has intensified speculation that CSX will need to merge with a major western railroad to compete.
CSX Chief Executive Officer Joe Hinrichs has stated that better cooperation between major railroads will improve freight transportation across the country and a merger is not needed.
Spracklin said an eventual acquisition of CSX would be the best result for stockholders.
“Our view is that the potential approval of the UNP/NSC deal will give a potential acquirer of CSX much more certainty related to the regulatory process and increases the likelihood a potential acquirer reconsiders their position at that time,” he said.
However, he said the current market view is that CSX won’t merge even if the UNP/NSC deal is approved, but that would still be positive for the stock.
“In this scenario, we believe there will be an incentive for increased rail collaboration and out-sized EPS growth as a result,” Spracklin said.
If the UNP-NSC deal is not approved, it would be “a neutral (to slightly negative) event for the stock,” he said.
Hinrichs shared his sentiment that CSX doesn’t need a merger partner at a Sept. 11 investor conference in California hosted by Morgan Stanley, and he reiterated his position six days later at a J.P. Morgan conference in London.
“Overall, we view the update and Q&A as a modest positive as it is clear the fundamental setup at CSX continues to improve with operations running very well even before completing three significant infrastructure projects,” J.P. Morgan analyst Brian Ossenbeck said in a note after hosting Hinrichs and Chief Financial Officer Sean Pelkey for a fireside chat.
“Industry consolidation remains a key topic for the entire sector and specifically for CSX which recently expanded services as the industry displays a newfound willingness to create new competitive options for shippers,” he said.
“CSX continues to attract a steady amount of incremental interest from investors with the perceived M&A premium largely out of the stock at this point.”