Executive Summary / Key Takeaways

• CSX, a leading Eastern U.S. railroad, is executing a service-led strategy focused on profitable growth and operational efficiency, underpinned by strategic network investments and technological tools.
• First Quarter 2025 results showed significant year-over-year declines in revenue, operating income, and EPS, primarily driven by lower commodity prices (coal, fuel), mixed market demand, and operational challenges exacerbated by severe weather and constraints from major infrastructure projects.
• Management views Q1 2025 as the profitability trough for the year and expects sequential improvement as network fluidity is restored, efficiency initiatives gain traction, and temporary construction impacts are managed.
• Key strategic initiatives, including the accelerated Howard Street Tunnel expansion and ongoing industrial development pipeline, are expected to remove competitive disadvantages and drive future volume growth and efficiency gains, supporting the long-term investment thesis despite near-term pressures.
• While macro uncertainty and tariff policies pose risks, CSX maintains a commitment to its capital allocation priorities, including investing in the network, pursuing high-return growth projects, and returning cash to shareholders, signaling confidence in its ability to deliver on its multi-year targets.

Setting the Scene: A Rail Giant's Strategic Evolution

CSX Corporation, established in 1978, stands as a cornerstone of North America's transportation infrastructure, primarily through its approximately 20,000 route-mile rail network spanning the Eastern United States, the District of Columbia, and parts of Canada. More than just a traditional freight hauler, CSX has evolved into a diversified transportation and logistics provider, integrating services like intermodal transport, truck-to-rail transfers via Transflo, specialized automotive distribution through TDSI, and bulk liquid chemicals trucking via Quality Carriers. This expansive network and integrated service offering form a significant competitive moat, providing unique access to key markets and ports across a region home to a substantial portion of the U.S. population and industrial activity.

Under its current leadership, CSX has embarked on a strategic transformation centered on a "lead with service" philosophy and fostering a "ONE CSX" team culture. This represents a deliberate shift, emphasizing consistent, reliable, and excellent customer service as the primary driver for strengthening relationships, expanding markets, and achieving profitable growth. This strategic pivot is supported by efforts to improve employee relations, notably through proactive engagement in labor negotiations, aiming to secure stability and focus on operational improvements.

The rail industry is inherently competitive, facing direct rivalry from other Class I railroads like Norfolk Southern (NSC), Union Pacific (UNP), Canadian National (CNI), and Canadian Pacific Kansas City (CP), as well as indirect competition from trucking, maritime shipping, and evolving logistics technologies. CSX's competitive positioning is defined by its strategic Eastern network, its integrated service offerings, and its focus on operational efficiency and technological adoption. While peers like UNP boast greater scale and often exhibit stronger operating margins (UNP TTM Operating Margin: 40.42% vs. CSX TTM Operating Margin: 34.54%) and lower debt-to-equity ratios (UNP TTM Debt/Equity: 1.92 vs. CSX TTM Debt/Equity: 1.61), CSX leverages its regional density and specialized services to compete effectively. NSC, a primary Eastern rival, presents similar network characteristics, with competitive financial metrics (NSC TTM Operating Margin: 34.01%, Debt/Equity: 1.22). CSX's strategic investments aim to enhance its specific competitive advantages, particularly in high-growth areas like intermodal.

Technological Edge and Infrastructure Modernization

Technology and infrastructure investment are critical pillars of CSX's strategy to enhance its competitive moat and drive efficiency. While specific, quantifiable benefits for all technologies are not detailed, the company highlights several key areas:

• Operational Tools: CSX is implementing improved tools like the Real-Time Operations Portal (RTOP). This technology is designed to strengthen communication and support faster, more effective decision-making across the network. While specific quantitative improvements from RTOP are not provided, the stated goal is to enhance operational control and responsiveness, which is crucial for improving service metrics like velocity and dwell.
• Fuel Efficiency Technology: The company has been leveraging fuel-saving technologies alongside operational initiatives. These efforts contributed to a $50 million decrease in fuel costs in Q1 2025, partly due to efficiency gains, and have resulted in improved fuel efficiency (gallons per gross ton-mile). The "so what" for investors is clear: enhanced fuel efficiency directly reduces a significant operating expense, contributing to cost control and margin support, particularly important in volatile energy price environments.
• Network Capacity and Modernization: Major infrastructure projects are central to CSX's long-term technological and operational advancement. The Howard Street Tunnel expansion in Baltimore is a prime example. This project, accelerated to be completed within 2025, is designed to remove a critical competitive disadvantage: the inability to run double-stack intermodal trains through this key corridor. Enabling double-stack capability will significantly increase capacity and efficiency on routes connecting the Midwest and the East Coast, allowing CSX to compete more effectively with rivals and potentially capture new, higher-margin intermodal traffic. While specific volume or revenue targets directly tied to the tunnel completion are not quantified, management views its current absence as a major competitive hurdle. Similarly, the Blue Ridge subdivision rebuild, necessitated by hurricane damage, is a significant capital investment aimed at restoring and potentially enhancing a vital part of the network. These infrastructure projects, while disruptive and costly in the near term, are foundational to CSX's strategy to build a safer, faster, and more reliable railroad capable of supporting future growth.

These technological and infrastructure investments are strategically positioned to enhance CSX's service product, reduce operating costs, expand market reach, and remove key competitive limitations, thereby strengthening its long-term competitive standing against peers like NSC and UNP who also invest heavily in network and technology.

Financial Performance: A Challenging Start to 2025

CSX's financial performance in the first quarter of 2025 reflected a confluence of challenging factors, resulting in a notable step back compared to the prior year. Total revenue decreased by 7% year-over-year to $3.42 billion. This decline was primarily attributed to lower coal revenue (down 27% on 9% lower volume), lower fuel recovery, decreases across several merchandise sub-segments (Automotive, Forest Products, Metals and Equipment), and lower trucking and other revenue. While merchandise pricing saw a modest 1% increase and intermodal volume grew 2%, these gains were insufficient to offset the broader revenue pressures.

Operating expenses increased by 2% to $2.38 billion. This rise was significantly influenced by approximately $45 million in additional costs linked to network disruptions, congestion, and severe winter weather, exacerbated by the ongoing infrastructure projects. Labor and fringe costs rose $16 million due to inflation, while purchased services and other expenses increased $54 million, partly from weather/disruption impacts ($25M) and inflation ($28M). Despite a $50 million decrease in fuel costs (driven by lower prices and efficiency), the overall expense base grew.

The combination of declining revenue and rising expenses led to a 22% decrease in operating income, falling to $1.04 billion. The operating margin compressed substantially, dropping 590 basis points to 30.4%. Net earnings followed suit, decreasing 27% to $646 million, resulting in a 24% decline in diluted earnings per share to $0.34. Management explicitly stated that Q1 2025 represented a trough for profitability, falling short of their internal expectations due to the severity of the operational challenges faced.

Looking at the broader financial health, CSX maintains a solid, albeit leveraged, balance sheet. As of March 31, 2025, the company held $1.14 billion in cash and short-term investments. Total assets stood at $43.2 billion, with net properties accounting for $35.86 billion, reflecting significant capital investments. Total liabilities were $31.02 billion, including $19.13 billion in total debt (including current maturities). The debt-to-equity ratio of 1.61 is higher than some peers like UNP (1.92) and CNI (1.02), indicating a more leveraged capital structure, though within typical ranges for the capital-intensive rail industry.

Cash flow generation remained robust despite the earnings decline. Net cash provided by operating activities was $1.26 billion in Q1 2025, an increase from $1.07 billion in Q1 2024, primarily due to the timing of tax payments. Net cash used in investing activities was $647 million, reflecting significant property additions ($719 million), including $133 million for the Blue Ridge rebuild. Net cash used in financing activities was $402 million, driven by share repurchases ($751 million) and dividends paid ($245 million), partially offset by a $600 million debt issuance. Free cash flow before dividends was $559 million ($1.26B operating cash flow - $719M property additions + $23M property dispositions), slightly down from $560 million in Q1 2024. This demonstrates the company's continued ability to generate substantial cash, supporting its capital investment plans and shareholder return commitments.

Outlook and Guidance: Expecting Improvement from the Trough

Management's outlook for the remainder of 2025 is framed by the expectation that the first quarter represented the low point for profitability and that sequential improvement is anticipated. The company continues to project overall volume growth for the full year, although acknowledging that near-term uncertainty stemming from rapidly changing trade and tariff policies makes precise forecasting challenging.

Revenue is expected to continue reflecting the impact of lower commodity prices and changes in mix. The year-over-year headwind from lower export coal benchmarks is anticipated to be similar in the second quarter to the first quarter but is expected to ease in the back half of the year, assuming current price levels hold.

The core of the near-term outlook rests on operational recovery. Management is focused on improving network fluidity, which deteriorated in Q1 (velocity down 3%, dwell up 19%). Actions are underway to stabilize operations, including deploying additional locomotives and mechanical staff, optimizing asset utilization, and adjusting capital track programs in affected areas. As fluidity improves, the company expects to capture demand that was missed in Q1 due to service disruptions, translating into revenue benefits and cost efficiencies. The $20-25 million in Q1 costs attributed to weather and congestion (beyond the planned reroute costs) represents an opportunity for expense reduction as operations normalize.

Capital expenditures for 2025 are projected to remain consistent with 2024 levels at approximately $2.5 billion, excluding additional costs for the Blue Ridge rebuild, which is now estimated to exceed $400 million in total (with $133 million spent in Q1 2025). This sustained investment underscores the commitment to network safety, reliability, and growth projects. Headcount is expected to remain relatively flat through the year, with a focus on driving labor productivity gains.

While specific quantitative guidance for full-year operating income or EPS was not provided in the Q1 update, management reiterated confidence in the long-term guidance shared at the November Investor Day. They indicated that, if adjusted for the estimated $350 million in discrete headwinds expected in 2025 (primarily commodity prices and network disruption costs), the company would be positioned towards the lower end of the previously communicated mid-to-high single-digit operating income growth range. This suggests that while 2025 faces significant temporary pressures, the underlying business momentum and strategic initiatives are expected to support a stronger trajectory in 2026 and 2027 as these headwinds cycle and the benefits of infrastructure investments materialize.

The balanced and opportunistic approach to capital returns remains in place, with share repurchases and dividends expected to continue, funded by cash from operations and potential debt issuances. This reflects management's confidence in future cash flow generation and the attractiveness of the current share valuation.

Risks and Challenges

Despite the strategic focus and long-term potential, CSX faces several pertinent risks and challenges that could impact its performance and the investment thesis:

• Operational Execution: The ability to restore network fluidity and improve service metrics after the Q1 disruptions is critical. Failure to effectively manage the ongoing constraints from the Howard Street Tunnel and Blue Ridge rebuild projects could prolong inefficiencies, limit volume capture, and increase costs.
• Macroeconomic Sensitivity: The company's performance is tied to the health of the industrial economy and consumer demand. Elevated macro uncertainty, shifting trade policies, and volatility in key markets like automotive and metals could negatively impact freight volumes and pricing power.
• Commodity Price Volatility: Fluctuations in benchmark coal prices and fuel costs directly impact revenue and profitability, as demonstrated by the significant headwinds in Q1 2025. While management expects these to ease, continued volatility could present ongoing challenges.
• Competitive Pressures: Competition from other railroads and the trucking industry remains intense. A persistently weak trucking market can pressure intermodal pricing, while efficiency gains or strategic moves by rivals could impact market share in various segments.
• Legal and Regulatory Environment: Ongoing legal proceedings (e.g., fuel surcharge litigation, environmental matters) and regulatory scrutiny (e.g., SEC investigation related to prior accounting restatement) pose potential financial and reputational risks.
• Natural Events: Severe weather and natural disasters can disrupt operations, damage infrastructure (as seen with Hurricane Helene), and incur significant costs for repair and rerouting.
• Labor Relations: While progress has been made on national agreements, ongoing negotiations with remaining unions could present uncertainties.

Conclusion

CSX is a vital transportation network currently navigating a period marked by significant near-term operational and market headwinds. The first quarter of 2025, characterized by declining revenue, compressed margins, and operational challenges exacerbated by weather and infrastructure projects, underscores the sensitivity of the business to external factors and the complexity of managing a vast rail network. However, viewing this quarter as a temporary trough, management remains focused on executing a clear strategy centered on service leadership, operational efficiency, and strategic investments.

The core investment thesis hinges on CSX's ability to leverage its foundational strengths—a critical Eastern network, an increasingly integrated service offering, and a commitment to technological and infrastructure modernization—to drive profitable growth. Key initiatives like the Howard Street Tunnel expansion and the robust industrial development pipeline are expected to remove competitive limitations and unlock future volume potential, particularly in the higher-growth intermodal and merchandise segments. While macroeconomic uncertainty, commodity price volatility, and competitive pressures persist, the company's focus on improving network fluidity, controlling costs, and maintaining strong customer relationships positions it to capitalize on opportunities as market conditions improve and temporary disruptions subside. The commitment to disciplined capital allocation and returning value to shareholders further signals confidence in the long-term trajectory. For investors, the current period represents a test of execution against a challenging backdrop, with the potential for sequential improvement throughout 2025 laying the groundwork for realizing the company's multi-year growth ambitions.