Intermodal freight is an important business segment for both CSX Corporation and Norfolk Southern , accounting for around 15% and 22% respectively, of the two companies’ freight revenues. Intermodal shipments are comprised of import and export container traffic as well as domestic container and trailer traffic. Since the rail networks of both CSX and Norfolk Southern are concentrated to the east of the Mississippi river, their international intermodal shipments pertain to container traffic from East Coast ports. Thus, to a large extent, the growth in intermodal shipments for these two companies is tied to the growth in container traffic at U.S. East Coast ports. The ongoing expansion of the Panama Canal, upon its completion, presents an opportunity for an increase in container traffic at East Coast ports. In this article, we will take a look at the potential implication of such an increase in East Coast container traffic on CSX and Norfolk Southern.

Potential Impact of Panama Canal Expansion on CSX and Norfolk Southern

The Panama Canal links the Pacific and the Atlantic Oceans, providing a shipping route that links the U.S. West and East Coasts. However, at its narrowest points, the Panama Canal is too narrow to allow for the passage of large container ships. Due to the bottlenecks presented by the Canal, a significant proportion of the cargo meant for the eastern half of the U.S. is delivered at West Coast ports and is transported by rail to markets in the East.

The expansion of the Panama Canal, which would widen and deepen the waterway to allow large oil tankers and container ships to pass through, commenced in 2007. However, the project has been beset by cost and time overruns. Currently, the project is tentatively scheduled for completion in 2016, though the specification of an exact date is difficult. The completion of the Panama Canal expansion would enable the movement of large container ships from Asia directly to East Coast ports. Sea transport is much cheaper than rail transport, though sea transport takes more time than rail transport. A direct route for the transport of container traffic by sea from Asia to the East Coast would reduce transportation costs and result in the diversion of some container traffic from the West Coast to the East Coast. As per estimates by The Boston Consulting Group and C.H. Robinson Worldwide, around 10% of the cargo moving from Asia to the U.S. could shift to the East Coast from the West Coast.

CSX and Norfolk Southern are the two major railroads serving the East Coast and these would be the major beneficiaries of an expansion in container traffic on the East Coast.

In order to model the impact of the expansion of the Panama Canal on the two rail companies, we will assume that the expansion is completed in 2016. With the increase in container traffic on the East Coast, rail companies serving the East Coast will benefit at the expense of the companies serving the Pacific Coast. In order to model the increase in intermodal shipments, we will assume a 500 basis points increase in the share of U.S. intermodal freight of the two companies by 2022, from our current estimates. In addition, we have factored in the corresponding increase in margins in our model. If we factor in these assumptions into our model for CSX, our price estimate for CSX increases by around 10% from $28.35 to $31.18. For Norfolk Southern, our price estimate increases by around 9% to $95.46. Thus, if the Panama Canal expansion is completed as planned, there is potential for an upward revision to the valuation of both CSX and Norfolk Southern.