Our $40 target price is based on a 20x target multiple on our 2026 EPS estimate, at the upper end of its long-term forward P/E range of 15x to 20x forward earnings. We believe our target multiple is justified by CSX’s strong cash flow generation and earnings potential, with underappreciated upside potential to earnings from buybacks and volume growth at high incremental margins on road-to-rail conversions as truck capacity tightens.

Risks to our target price are as follows. We have some concerns over potential share loss to its Eastern peer, NSC, given NSC has gained experienced operating executives in new COO John Orr and changes to the Board due to its 2024 activist campaign. Recent evidence of better service heightens NSC’s prospects for margin improvement driven by operational efficiency, which could ultimately lead to capacity enhancement and service gains that could drive market share gains at the expense of CSX. Another key risk is whether CSX can sustainably increase volumes, an area that has challenged the company for years. CSX's strategy of bringing in former Ford executive Joe Hinrichs, who is seen as more customer-focused, is testing this premise. CSX was a leader in bringing precision scheduled railroading (PSR) to the U.S. Class 1 rails, benefitting from Hunter Harrison and Jim Foote’s implementation, with significant OR gains during their time at the helm. It remains to be seen whether CSX could have further OR improvement opportunities not dependent on operating leverage from volume growth.