High growth potential and low regulatory risk characterize the US rail industry, according to Morgan Stanley research.
Reporting specifically on CSX, William Greene and Adam Longson noted the railroad still has an impressive growth profile through 2010. As part of the railroad's filings, CSX offered highlights of improvements in operating and financial performance under its current management. The company was attempting to fend off activists who were seeking to replace some board members. Included in the highlights was a bullish management outlook for 18% to 21% compound annual growth (CAGR) in earnings per share before buybacks and a 30% operating margin.
The Morgan Stanley analysts differ with this view saying it is not bullish enough.
In a separate report, Morgan Stanley analysts said they saw little risk of any regulatory action on a rail pricing model. “While we believe a move to replacement cost would be a long-term positive,” said the analysts, “we should caution that this is no panacea for rails."
The report cited four reasons: 1) Rail pricing evolves slowly as contracts expire, 2) Rates on captive customers are already limited by standalone cost (SAC) methodologies that factor in replacement cost, 3) Competitive rates will still be determined by market conditions and the price of substitutes, and 4) A greater umbrella for pricing could heighten congressional scrutiny.
The Association of American Railroads (AAR) submitted a formal request to the Surface Transportation Board detailing its replacement cost methodology which already incorporates a number of procedures used in STB rate cases. This, said the analysts, should reduce barriers to adoption. The STB will review the AAR proposal and could hold public hearings, which could generate some heavy debate from shippers who perceive the methodology is skewed in favor of the railroads.