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Gary Greenwood's Insights  
 


InvestorsObserver
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Gary Greenwood
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October 20, 2014 - Oil: A Slippery Track for CSX?

 

When a train carrying coal crashes, you scoop up the mess, put it on another train, and continue your journey. When a train carrying oil crashes, it goes BOOM ! POW!

A safety official described the dangers of transporting oil by rail the same as having fifty-six 747 jetliners flying through your city at the same time.

I guess you just hold your breath, and hope nothing happens.

The wait and see solution is not the most practical or safe. The problem stems from the fact that pipelines have not been able to keep up with the volume of oil being produced, especially in the Bakkan region of North Dakota. These companies need to move their product and since there are no pipelines in the region, they put it on railroads. Those same railroads have been hit hard by the pullback in coal consumption in recent years. Shipping by rail seems like a great idea on paper, but putting this plan to work revealed an antiquated  rail system littered with old regulations and outdated equipment.

Mr. Edward R. Hamberger, president and CEO of the Association of American Railroads, said that rail transit companies will spend $26 billion just this year to upgrade their equipment and hire new workers.

This was a little too late for the 47 Canadians who lost their lives due to an accident in 2013. A fiery blaze in Lynchburg, Va. earlier this year could easily have been worse. A witness was quoted as saying it was, “lucky it didn’t burn the whole city.”  Boom, Pow indeed.

The story of the little engine that could, takes on a whole different meaning when that "could" means blowing up metropolitan areas.

CSX skirted disaster in Lynchburg. The company's stock also seems to have dodged a bullet. Investors, for whatever reason, didn’t respond negatively to the accident and   CSX’s stock has risen 19% in the five months since the accident.

The company recently announced a $100 million increase in quarterly revenues from the same period last year, while earnings per share increased by 33%.

The stock has also maintained a consistent dividend payout for more than 13 years. The company seems committed to keeping the stock in a certain range having split the stock 2-for-1 in 2006 and 3-for-1 in 2011.

But there are other explosive problems. Statistics show that because of the increase in traffic moving oil through the different railroads, passenger travel has slowed by 60%. The cost for farmers to ship their produce has doubled because they have to use more trucks, and auto manufacturers have inventory sitting, unable to move. An increase in demand is usually good for an industry, but in the case of railroads, is seems like an increase in supply may be needed.

Canadian Pacific Railroad recently proposed a merger with CSX, but the company has rejected this offer. That could be the opening move of a negotiation though, as few sales are made after a single offer.


Chart courtesy of stockcharts.com

Investors who want to take advantage of the recent strength in the stock, but also want to hedge against a potential disaster could consider a Jan. 2015 covered call. Selling one contract of the Jan. 32 call for each 100 shares of the stock you buy creates a net debit of $30.39, giving you a potential 5.3% return and 7.9% downside protection.

 

 

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