Executive Summary / Key Takeaways

• CSX Corporation is undergoing a strategic transformation under new CEO Stephen F. Angel, aiming for "best performing railroad in North America" through operational excellence and disciplined growth across financial, safety, and customer service metrics.
• Recent Q3 2025 results demonstrate a strong operational recovery, with improved train velocity and dwell times, despite a significant goodwill impairment in its Quality Carriers trucking segment and ongoing commodity price headwinds.
• Major infrastructure projects, including the Howard Street Tunnel and Blue Ridge Subdivision rebuilds, are complete or nearing completion, poised to unlock significant network capacity and competitive advantages for intermodal services by Q2 2026.
• The company is focused on long-term profitable growth, driven by a robust industrial development pipeline, successful truck-to-rail conversions, and sustained efficiency gains, with a positive outlook for 2026 and beyond.
• Key factors for investors to monitor include the sustained improvement in operational metrics, the realization of full benefits from network investments, and the impact of a persistently soft trucking market on overall profitability.

Setting the Scene: A Railroading Powerhouse Forges Ahead

CSX Corporation, established in 1978, stands as a pivotal rail-based freight transportation provider across the Eastern United States and parts of Canada. Its extensive 20,000 route-mile network is a critical artery for diverse commodities, including chemicals, agricultural products, and intermodal freight. The company's strategic vision, recently articulated by new President and CEO Stephen F. Angel, is to become the "best performing railroad in North America," a goal encompassing not only financial metrics but also safety, customer service, and employee engagement. This ambition is rooted in CSX's history of expanding its service offerings through subsidiaries like Quality Carriers for bulk liquid chemicals and TDSI for automotive distribution, continually adapting to market demands.

Competitive Landscape and Strategic Positioning

In the fiercely competitive North American rail industry, CSX strategically leverages its dense network east of the Mississippi River, a distinct advantage in serving populous manufacturing and distribution hubs. This regional strength provides CSX with greater efficiency in shorter-haul routes compared to the broader, transcontinental reach of rivals like Union Pacific (UNP) and Canadian National Railway (CNI). CSX's emphasis on integrating rail-to-truck transfers further enhances its flexibility in intermodal services, offering a seamless experience for customers. While UNP excels in large-scale western operations and CNI in cross-border efficiency, CSX's specialized services for U.S. manufacturing and access to key East Coast ports differentiate its value proposition.

The company faces direct competition from Norfolk Southern (NSC) in the Eastern U.S., where both vie for intermodal and bulk transport. CSX's operational reliability and customer-specific innovations, such as distribution centers, often provide an edge. However, CSX's network breadth is a comparative disadvantage against the expansive networks of CNI and the newly integrated Canadian Pacific Kansas City (CPKC), which offers end-to-end solutions across North America. The recent CPKC merger, which launched the Southeast Mexico Express (SMX) in December 2024, creates a new east-west Class 1 corridor, intensifying competition in cross-border and intermodal markets. CSX's response includes actively pursuing truck-to-rail conversions and expanding its intermodal capabilities, such as through the Howard Street Tunnel project.

Indirect competition from the trucking industry, particularly in a "persistently soft trucking market," continues to exert pricing pressure, as evidenced by the goodwill impairment in CSX's Quality Carriers trucking segment. Despite this, Quality Carriers has successfully driven truck-to-rail conversions and maintained stable pricing. CSX's strategic positioning aims to mitigate these pressures by focusing on service excellence and leveraging its network to offer cost-effective and environmentally sustainable rail solutions, thereby converting highway volume to rail.

Technological Differentiation and Innovation

CSX's commitment to operational excellence is underpinned by its strategic investments in technology designed to enhance safety, efficiency, and customer service. A core technological differentiator is the Real-Time Operations Portal System (RTOP), a sophisticated tool previewed at its Investor Day. Hundreds of railroaders utilize RTOP daily to "strengthen communication, and support faster, more effective decision-making" across the network. This system provides a unified view of operations, enabling quicker responses to disruptions and optimizing train movements.

Further enhancing safety and operational reliability, CSX employs advanced detection technologies. This includes "yard inspection drones that will assist in identifying conditions that lead to track caused derailments in our yards," providing proactive maintenance insights. Additionally, the company is improving its "wayside car health monitoring systems to prevent impact from equipment failures". These technologies collectively aim to reduce human factor accidents and equipment failures, which Mike Cory noted were down 16% year-to-date in Q3 2025 due to "targeted efforts, better training, and smarter tools". The tangible benefits for investors include reduced operational risks, lower maintenance costs, and improved network fluidity, all contributing to higher asset utilization and a stronger competitive moat.

CSX's capital investments also extend to "track, bridges, signals, equipment and detection technology," supporting overall safety performance. While specific quantifiable improvements from each technology are not always disclosed, the strategic intent is clear: to build a more resilient, efficient, and safer railroad. These technological advancements are foundational to CSX's ability to achieve "best in class" operating margins and return on capital, by enabling continuous improvement and driving productivity gains across its capital-intensive business.

Financial Performance and Operational Details

CSX's financial performance in the third quarter of 2025 reflected a mixed operating environment, yet demonstrated underlying operational resilience. Total revenue for Q3 2025 decreased by 1% year-over-year to $3.59 billion, primarily due to declines in export coal revenue and merchandise volume, partially offset by strength in intermodal and other revenue streams. For the nine months ended September 30, 2025, total revenue was $10.58 billion, a 4% decrease from the prior year, influenced by lower coal revenue and reduced fuel recovery.

Operating income for Q3 2025 stood at $1.09 billion, a 20% decrease year-over-year. This figure includes a significant $164 million goodwill impairment charge related to Quality Carriers, CSX's trucking operating segment. Excluding this non-cash impairment, adjusted operating income was $1.25 billion, yielding an adjusted operating margin of 34.9%. Net earnings for Q3 2025 were $694 million, or $0.37 per diluted share, declining 22% and 20% respectively year-over-year. On an adjusted basis, net earnings per share were $0.44. The nine-month period saw net earnings of $2.17 billion, or $1.16 per diluted share, down 21% and 17% respectively.

Operational metrics in Q3 2025 showcased considerable improvement, underscoring the company's focus on efficiency. Train velocity increased by 2% year-over-year to 18.9 miles per hour, marking the fastest quarter since early 2021. Dwell time improved by 8% to 9.5 hours, reaching its lowest point since mid-2023. Average daily cars online also saw a 4% improvement, hitting their lowest level since 2020. Customer service metrics also advanced, with Intermodal Trip Plan Performance (TPC) rising to 93% and Carload TPC climbing to 83%. These operational gains, achieved despite ongoing major infrastructure projects, reflect "strong cost momentum" and "efficiency savings across the expense base". Fuel efficiency improved by 1% year-over-year to 0.94 gallons per 1000 gross ton-miles. Safety performance also saw positive trends, with the FRA Personal Injury Frequency Index improving by 7% and the FRA Train Accident Rate improving by 21%.

Segment-wise, the Rail segment's operating income for Q3 2025 was $1.26 billion. Merchandise revenue decreased 1% to $2.21 billion, impacted by lower chemical and agricultural shipments, though minerals and automotive segments showed growth. Intermodal revenue grew 4% to $527 million on a 5% volume increase, driven by international shipments and new domestic service offerings. Coal revenue declined 11% to $490 million, primarily due to reduced export production, but domestic utility coal saw a 22% increase in tonnage. The Trucking segment, primarily Quality Carriers, experienced a 3% revenue decrease to $207 million, alongside the significant goodwill impairment.

Liquidity and Capital Allocation

CSX maintains a robust liquidity position, with $618 million in cash, cash equivalents, and short-term investments as of September 30, 2025. For the nine months ended September 30, 2025, net cash provided by operating activities was $3.23 billion, a decrease of $632 million year-over-year, primarily due to $429 million in previously postponed tax payments and lower cash-generating net earnings. Free cash flow for the same period was $1.07 billion, down from $2.22 billion in the prior year, reflecting increased capital expenditures.

Capital investments remain a top priority, focusing on safety, reliability, and long-term growth. Property additions for the nine months ended September 30, 2025, totaled $2.23 billion, including $440 million dedicated to rebuilding the Blue Ridge subdivision following Hurricane Helene. Total spending on the Blue Ridge rebuild is projected to exceed $500 million. The company issued $600 million of 5.05% notes due 2035 in March 2025 to support general corporate purposes, including capital investments and share repurchases. CSX also has access to a $1.20 billion unsecured revolving credit facility and a $1 billion commercial paper program, both with no outstanding balances as of September 30, 2025.

Shareholder returns are a consistent component of CSX's capital allocation strategy. The company repurchased $1.28 billion in shares and paid $730 million in dividends during the nine months ended September 30, 2025. A $1.30 billion share repurchase authority remained as of September 30, 2025. The "One Big Beautiful Bill Act," enacted in July 2025, is expected to provide a favorable cash tax impact of approximately $250 million for the 2025 tax year due to changes in bonus tax depreciation.

Outlook and Guidance

CSX anticipates delivering overall volume growth for the full year 2025, with Q4 results expected to reflect strong operating performance and cost efficiencies. Management projects a "long term track record of powerful cash generation". A significant tailwind for 2026 is the expected reversal of approximately $100 million in network disruption costs incurred in 2025 due to the Howard Street Tunnel and Blue Ridge projects. This non-recurring expense will transform into a net benefit as these projects are completed and operational efficiencies are realized.

The company's long-term guidance, reiterated by Sean Pelkey, projects "high-single-digit to low-double-digit EPS growth" over a three-year period, predicated on stable commodity prices (averaging 2024 levels by 2027). While Q1 2025 was an earnings trough, CSX expects sequential improvement throughout the year and a return to year-over-year growth in the second half of 2025. This recovery is supported by diminishing year-over-year headwinds from lower coal and fuel prices. Headcount is expected to remain stable to slightly lower sequentially in Q4 2025, with cost per employee seeing a normal seasonal increase. Capital expenditures for 2025 are guided at approximately $2.5 billion, excluding Blue Ridge rebuild costs, and no major construction projects of similar scale are planned for 2026.

Risks and Challenges

Despite a clear strategic path, CSX faces several risks that could impact its investment thesis. The most immediate financial challenge is the "extended trucking market recession" and "ongoing economic uncertainty," which led to a $164 million goodwill impairment charge for Quality Carriers in Q3 2025. This highlights the vulnerability of its trucking segment to market downturns and competitive pressures.

Operational disruptions, as experienced in Q1 2025 due to severe weather and infrastructure project constraints, can lead to missed revenue opportunities and increased expenses. While the network has shown strong recovery, unforeseen events could still impact performance. Furthermore, commodity price volatility, particularly in export coal benchmarks and fuel prices, continues to create revenue headwinds, with management expecting a "similar commodity price headwind in the second quarter" of 2025.

Environmental liabilities, with CSX identified as a potentially responsible party at approximately 220 sites, pose an ongoing risk, as "conditions that are currently unknown could... result in additional exposure". Legal proceedings, including fuel surcharge litigation and FELA claims, also present potential financial and operational uncertainties. While management believes these are unlikely to have a material adverse effect, an "unexpected adverse resolution of one or more of these items... could have a material adverse effect". Lastly, while insurance coverage is maintained, "future claims could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates".

Conclusion

CSX Corporation stands at a pivotal juncture, demonstrating a resilient operational turnaround and strategic foresight under new leadership. The company's commitment to achieving "best in North America" performance is evident in its robust operational improvements, including record train velocity and dwell times, and its significant investments in network capacity and technological enhancements. The completion of transformative projects like the Howard Street Tunnel and Blue Ridge Subdivision rebuilds is set to unlock substantial competitive advantages, particularly in intermodal services, and drive long-term profitable growth.

While near-term headwinds from commodity price volatility and a soft trucking market present challenges, CSX's disciplined cost management, strong industrial development pipeline, and unwavering focus on customer service position it for a compelling future. The anticipated reversal of project-related costs in 2026 and the sustained benefits from strategic investments underscore a clear path toward realizing its high-single-digit to low-double-digit EPS growth targets. For discerning investors, CSX represents an opportunity to invest in a foundational infrastructure asset poised for enhanced efficiency, expanded market reach, and sustained value creation.