Monday, 8 April 2024 Reading time : 2 minutes

Transportation is an essential part of any economy. Governments, individuals, and businesses depend on a functioning transportation system to move energy, construction materials, consumer goods and people. Today, roads, waterways, pipelines and railways are the means of transportation. With the current trend of deglobalization, which is accompanied by the onshoring of production chains, as well as the global pressure to reduce emissions, rail transport is increasingly attracting infrastructure investors.

Rail transportation is already an important component of the global infrastructure. But while rail freight is often a profitable business, roadways in most countries lose money. Deutsche Bahn, for example, lives off the profits of its DB Cargo subsidiary, which provides rail freight services throughout Europe.

In contrast to Germany, roadways in the United States were separated from freight railroads by the Rail Passenger Service Act of 1970. The roadway company Amtrak, in which the US government holds a majority stake, is still responsible for public rail transportation in the US today. Since its inception more than 50 years ago, Amtrak has never been able to make a profit on their fares. Last year, it lost more than USD 750 million and received USD 3 billion in government subsidies.

Rail freight in the United States is privately owned. The nearly USD 80 billion industry is dominated by seven major carriers, but there are also smaller regional and local carriers. Currently, about 28% of US freight is moved by rail. This includes agricultural and energy products, chemicals, components, and consumer goods. After China and Russia, the US ranks third in the world in tons-per-mile of rail freight traffic, and the trend is rising. According to the US Department of Transportation, urbanization in the US is expected to increase, resulting in larger metropolitan areas and higher freight volumes.

CSX Corporation is one of the seven dominant US railroads. The company's primary business is rail freight, but it has expanded vertically to include trucking services. This gives CSX the flexibility to deliver goods such as coal, chemicals, and consumer products directly to end customers. This allows the company to offer intermodal transportation, which now accounts for 45% of its traffic. Through a merger and several acquisitions, CSX has established a presence in 26 eastern US states and the Canadian provinces of Ontario and Quebec. In the last calendar year, profits fell about 10% due to higher administrative and overhead costs. However, CSX fared better than its main competitor, Norfolk Southern, whose profits fell by more than 40%.

Investment solution
For investors who want to position themselves in CSX but want to hedge against possible price setbacks, a Barrier Reverse Convertible on the share offers an investment opportunity. The product features a barrier of 75% and pays a guaranteed coupon of 8% per year.
Termsheet (Valor: 132912408)

Indicative terms 

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