A Soft Quarter, a Strong 2026 Guide, a Cheaper Stock: Maintaining CSX at Outperform

Results vs. Consensus

This is a headline miss that the market chose to look through. The $0.39 GAAP EPS carried ~$0.02 of deliberate restructuring charges ($31M of separation costs plus $21M of technology-asset impairments); back those out and EPS of ~$0.41 sits at the low end of consensus. The more important point is that the print landed roughly where a "subdued demand" quarter should, and the entire investment debate has shifted to the 2026 guide, which is where the stock's +2.4% reaction came from.

Q4 Year-over-Year Comparison

Full Year 2025

Revenue: pricing turns the corner even as volume stays soft

Volume rose 1% but revenue fell 1%, with RPU down 2% on negative mix and the still-declining export-coal benchmark. The encouraging development beneath the soft headline is pricing: intermodal RPU turned positive (+2%) for the first time in the cycle, and merchandise RPU rose 1%, as the new commercial leadership began implementing pricing structures management says will deliver better price/yield in 2026 than in 2025. With the network running well and service at a premium, CSX is finally converting its operational recovery into pricing power, the precondition the whole thesis rests on.

Margins: the trough, with the recovery guided

Adjusted operating margin of ~33.0% (31.6% GAAP, after $50M of charges) was down ~130 bps year-over-year, the cyclical low. But this is the last quarter the comparison looks like this. The 2026 guide for 200-300 bps of expansion is built on workforce optimization (rail headcount down 3%-plus), 100-plus discretionary-cost initiatives, the roll-off of disruption and one-time costs, and a more fluid network. On ~$14.4B of revenue, the midpoint of that guide is roughly $350M-plus of incremental operating income before any volume leverage.

EPS and capital: the buyback stays measured, the dividend grows

GAAP EPS of $0.39 was down on the charges and the margin compression; the 3% lower share count provided partial support. Full-year repurchases were $1.40B (down from $2.24B in 2024) and the Q4 pace stayed measured (~$132M), consistent with the capital-preservation posture that began in Q3. Meanwhile the dividend rose again (FY dividends $972M vs. $930M), extending a 20-plus-year streak of increases. The 2026 free-cash-flow guide (+50%) is the number that ultimately funds both, and it is the most underappreciated line in the guidance.

Segment Performance

Merchandise — soft volume, positive pricing, mixed end-markets

Merchandise volume and revenue each fell 2%, but RPU rose 1% as core pricing began to outrun fuel and mix. The dispersion persisted: minerals (+6% volume, +10% revenue) and fertilizers (+7%) led on infrastructure and phosphate-production recovery, while chemicals (-6%), forest products (-11%) and automotive (-5%) lagged on weak industrial demand, plant closures, and chip/metals supply constraints. New CCO Mary Claire Kenny flagged 2026 benefits from new facilities ramping and from cycling the 2025 plant closures.

"Our merchandise franchise, where volume and revenue were both down 2%, continues to face market-driven headwinds. Revenue per unit was modestly higher and was also affected by mix, as growth was strongest in low-RPU areas such as minerals and fertilizers." — Mary Claire Kenny, SVP & Chief Commercial Officer

Assessment: The merchandise book is doing the right things in a bad tape, holding and modestly raising price while the cyclical commodities (chemicals, forest, autos) stay depressed. The 2026 lever is the cycling of the 2025 plant closures plus new-facility ramps; the macro is not yet a tailwind.

Intermodal — the growth and now pricing engine

Intermodal was again the standout: volume up 5% and revenue up 7%, with RPU finally positive (+2%) on new domestic and international business won through faster transit times and expanded connectivity. The Howard Street double-stack catalyst is now imminent: the first of two bridges is raised, customers are bidding now, and double-stack volume begins moving through the tunnel in Q2 2026.

"At Howard Street, the first of two bridges being raised to support double-stack capability is now complete, and our customers are excited about the opportunities coming later this spring. They are bidding on business now for volume to start moving double stack through the tunnel in Q2." — Mary Claire Kenny, SVP & Chief Commercial Officer

Assessment: Intermodal is doing exactly what the thesis needs: growing volume and now price simultaneously, in a soft truck market, before the structural double-stack capacity even arrives. This is the clearest evidence that the commercial engine and the network investment are converting into durable growth.

Coal — domestic strength, export benchmark still a drag

Coal volume rose 1% but revenue fell 5% as the export met benchmark stayed weak and the East Coast met discount to Australian pricing widened. The bifurcation continued: domestic tonnage rose 6% on a substantial utility increase (power demand, higher gas prices), while export tonnage fell 3%, dampened partly by a late-October derailment. Two important met-coal mines reopened, but global steel markets remain subdued.

"Domestic tonnage increased by 6% driven by a substantial increase in domestic utility volume supported by growing power demand and higher natural gas prices." — Mary Claire Kenny, SVP & Chief Commercial Officer

Assessment: The domestic-coal-as-power-demand-beneficiary story continues to build, with delayed plant retirements an added support. Export met remains the swing factor and a drag; 2026 coal is guided on benchmarks "consistent with current levels," so coal is neither the tailwind the bulls hoped nor the collapse the bears feared, a wash that lets the self-help levers carry the year.

Operating Statistics & KPIs

Assessment: The operating book is now firing on every cylinder. Velocity is up 7% to its highest in years, dwell improved 13%, and both safety metrics posted the best quarter of 2025 (the train-accident rate fell 47%). This matters because the 2026 margin guide depends on a stable, fluid network to deliver the cost savings, and the exit-rate operating performance says that foundation is firmly in place. The network is no longer the story; the demand environment is.

Key Topics & Management Commentary

Overall Management Tone: Sober on the present, disciplined on the plan. Angel set a candid tone ("this has been a challenging year"), declining to sugarcoat the demand backdrop or promise a macro turn, and instead concentrated the call on the controllables: cost, productivity, capital discipline, and a quantified 2026 margin commitment. The confident M&A framing of the prior quarter receded; the message was that value will be created by running the railroad better, with consolidation a longer-dated process to be managed rather than chased.

The 2026 Guidance Framework

The centerpiece. Against an explicit assumption of no macro improvement (flat industrial production, modest GDP, current fuel/coal prices), management guided low-single-digit revenue growth, 200-300 bps of operating-margin expansion, capex below $2.4B, and 50%-plus free-cash-flow growth.

"We are assuming low single-digit revenue growth for the year... We expect to deliver year-over-year operating margin expansion in the range of 200 to 300 basis points... For free cash flow, higher earnings, a more normalized cash tax rate, and lower capital outlays should drive growth of at least 50% compared to 2025." — Steve Angel, President & CEO

Assessment: This is the de-risked, self-help-driven margin recovery the thesis requires, now formalized as guidance off a conservative demand assumption. Critically, the margin expansion is not predicated on a volume recovery, it is cost-and-pricing-led, which is the most reliable kind. The free-cash-flow inflection (lower capex plus higher earnings plus normalized taxes) is the most underappreciated element.

Withdrawal of the 2024 Investor Day Targets

Angel retired the 2025-2027 multi-year targets set under prior leadership, citing a materially different macro and industry backdrop, and replaced them with 2026-only guidance.

"The macroeconomic environment and the industry dynamics were meaningfully different than compared to today. I am replacing our 2025-2027 targets with the guidance we have given for 2026 only." — Steve Angel, President & CEO

Assessment: A double-edged move. Honest, a new CEO should not be bound by a predecessor's framework set in a different cycle, and it removes a stale benchmark the Street was already discounting. But it also lowers the multi-year bar and defers the re-establishment of long-term targets, which is a modest negative for investors who want a multi-year algorithm. On balance, credibility-positive, ambition-neutral.

The M&A Posture, Recalibrated

Where Q3's call leaned into "going into that discussion from a position of strength," Q4 deliberately set the merger aside, framing any rail deal as a years-long regulatory process drawn from Angel's own Praxair/Linde experience.

"It took three years before the final restriction was lifted. So for three years, we were kind of in deal purgatory... you can set the merger aside, we are going to manage that... what we know we can do now is run this company better every day." — Steve Angel, President & CEO

Assessment: This is a healthy recalibration, not a retreat. Angel is signaling that the M&A option is real but multi-year and regulatorily uncertain, and that investors should value CSX on its standalone trajectory, with consolidation as upside rather than the base case. For our rating, that is actually clarifying: the Outperform no longer leans on a takeout, it leans on a guided earnings inflection, with the option on top.

Pricing and the Price/Cost Spread

Angel, whose playbook is built on price and productivity, said 2026 price/yield will exceed 2025's, with the new commercial chief implementing fresh pricing structures, though it will take a full year to reprice every contract.

"Price yield will be [better] in 2026 over 2025 than it was in 2025 over 2024... it would probably take until about this time next year before we had a chance to touch every contract and stress test... what the right price is versus the value we are bringing to that customer." — Steve Angel, President & CEO

Assessment: Pricing is the highest-quality margin lever, and Angel is methodically rebuilding it. The Q4 RPU inflection (intermodal +2%, merchandise +1%) is the leading edge; the full benefit accrues through 2026 as contracts reprice. This is the durable, compounding part of the margin story.

Cost Restructuring and the Leadership Reshuffle

The $50M of Q4 charges ($31M severance, $21M technology rationalization) funded a structural cost reset: 100-plus savings initiatives, rail headcount down 3%-plus, and a renewed leadership team, with Kevin Boone returning to CFO and Mary Claire Kenny taking commercial.

"We have renewed the leadership team, putting the best people into the best positions to drive value. And we are aligned in driving greater fiscal responsibility and disciplined execution across the company." — Steve Angel, President & CEO

Assessment: A new CEO putting his own team in place and taking restructuring charges to reset the cost base in his first full quarter is exactly the playbook that produced superior returns at Praxair/Linde. The execution risk is real (a third leadership configuration in under a year), but the direction, cost discipline plus accountability, is the right one for a trough year.

Capital Discipline and Free Cash Flow

With Blue Ridge complete, 2026 capex drops below $2.4B from ~$2.9B, and management is instituting tighter capital oversight, the lever behind the 50%-plus free-cash-flow guide.

"With our Blue Ridge project complete and focused efforts on capital discipline in place, we plan for 2026 CapEx below $2.4 billion, a substantial reduction from last year." — Steve Angel, President & CEO

Assessment: The free-cash-flow inflection is the quietest but arguably most important part of the 2026 story. Lower capex plus recovering earnings plus a normalized cash tax rate compounds into materially more capital available for buybacks and dividends, the mechanism by which a low-single-digit revenue grower delivers double-digit per-share growth.

Guidance & Outlook

Implied earnings power: Low-single-digit revenue growth on ~$14.1B plus 200-300 bps of margin expansion implies operating income up roughly 8-12%, which, levered by a shrinking share count, supports the double-digit EPS growth management has framed since mid-2025, now off a conservative, no-macro-help demand assumption. The guide is set to be beaten if the industrial cycle turns at all.

Guidance style: Conservative and credible. By assuming no macro improvement and still guiding to meaningful margin and FCF growth, Angel has built in cushion, the hallmark of a CEO who would rather raise through the year than cut. This is the right posture for a new leader establishing a track record.

Analyst Q&A Highlights

The pricing and price/cost-spread opportunity

The opening question went to the heart of the Angel playbook: with price and productivity his two hallmarks, where is the pricing opportunity? Angel confirmed an improving price/yield trajectory and a year-long contract-repricing runway.

Q: "I think, Steve, focus on price and productivity [are] kind of two hallmarks of your approach. How do you think about the opportunity to [improve the price/cost spread]?"
— Tom Wadewitz, UBS

A: "Price yield will be [better] in 2026 over 2025 than it was in 2025 over 2024. So we are making progress on the pricing front. It will be a bit slow going... it would probably take until about this time next year before we had a chance to touch every contract and stress test... what the right price is versus the value we are bringing."
— Steve Angel, President & CEO

Assessment: The pricing recovery is real but gradual, a multi-quarter contract-by-contract grind rather than a step-change. That cadence is actually higher quality, durable repricing compounds, and it underpins the margin guide with a lever that is largely within management's control.

How CSX is positioned for the transcontinental merger

An analyst asked the unavoidable strategic question, how does CSX position for a potentially transformational East-West merger, and Angel notably set it aside in favor of standalone execution.

Q: "I would be remiss not to ask about the major merger that is underway for this industry... how are you positioning the company in the wake of what could be a pretty transformational deal? And what is the strategy for CSX as kind of the full East Coast merger?"
— Stephanie Moore, Jefferies

A: "It's a long process... there are going to be opportunities we can take advantage of. We see some today... Whatever risks are out there, we'll manage those, we'll mitigate those... But at the end of the day, we can create value by running CSX better every day. So you can set the merger aside, we are going to manage that."
— Steve Angel, President & CEO

Assessment: A deliberate de-emphasis. Angel is telling investors to underwrite CSX on its standalone trajectory and treat the merger as a multi-year, manage-the-process overhang/option rather than a near-term catalyst. That reframing lowers the near-term M&A expectation but raises the quality of the standalone case the rating now rests on.

The starting-point operating ratio and the margin base

An analyst pressed for the precise 2025 base off which the 200-300 bps of margin expansion is measured. Angel confirmed it is the adjusted figure, excluding the goodwill charge.

Q: "One fine point on the OR improvement, if you could tell us what the base OR is in 2025, kind of just like what's included."
— Tom Wadewitz, UBS

A: "The starting point for 2025 is obviously excluding the charge that we took on goodwill. So that's the starting point that we have in the adjusted number that we disclosed."
— Steve Angel, President & CEO

Assessment: Important for modeling: the 200-300 bps builds off the ~33.2% adjusted full-year operating margin (a ~66.8% operating ratio), implying a 2026 adjusted margin of roughly 35-36% (OR ~64-65%). That is a return toward best-in-class territory and a credible, quantified target.

The 2026 cost-savings composition

Questions on the durability of the cost program drew detail on the 100-plus initiatives and the non-repeating 2025 items that flow through as 2026 tailwinds.

Q: "Can you help us think about the moving pieces on cost into 2026, what is structural versus what is just non-repeating?"
— Multiple analysts incl. Tom Wadewitz, UBS

A: "2026 expenses will see year-over-year benefit from cycling network disruption costs, third and fourth quarter separation costs, and fourth quarter technology impairments... well over 100 diverse savings initiatives across the company, including cutting outside and professional service spend, improving asset utilization, and maintenance efficiencies."
— Kevin Boone, EVP & CFO

Assessment: The cost bridge is a healthy mix of non-repeating items (disruption, severance, impairments) and structural programs (headcount, discretionary spend, asset utilization). The structural component is what makes the margin expansion durable beyond 2026, and it is squarely the kind of program Angel's track record suggests he will execute.

Intermodal momentum and the double-stack ramp

Analysts probed the durability of the 5% intermodal volume growth and the Q2 2026 double-stack opportunity.

Q: "Intermodal really stood out again, can you frame the durability of that growth and the size of the Howard Street double-stack opportunity?"
— Multiple analysts incl. Stephanie Moore, Jefferies

A: "We have been winning new domestic and international business as we brought faster transit times and more connectivity... customers are bidding on business now for volume to start moving double stack through the tunnel in Q2. We will grow into it... it will not be an overnight phenomenon."
— Mary Claire Kenny, SVP & Chief Commercial Officer

Assessment: Intermodal is the cleanest growth story in the franchise, share gains in a soft market, now with a structural Q2 2026 double-stack catalyst that ramps through the year. The "grow into it" framing tempers near-term expectations appropriately while preserving the multi-year build.

What They're NOT Saying

1. No new multi-year targets: Angel withdrew the 2025-2027 framework and offered only 2026 guidance, leaving the long-term algorithm undefined until a future investor day. Investors lose the multi-year scoreboard for now.
2. No specific 2026 EPS number: The guide is margin, capex, and FCF; EPS is left to triangulation. The double-digit-growth framing is implied, not stated.
3. M&A went conspicuously quiet: After leaning into strategic optionality in Q3, the prepared remarks omitted it entirely, and the Q&A answer set it aside. The shift in emphasis is itself information, though whether it reflects regulatory reality or a genuine cooling is unclear.
4. Quality Carriers, still no resolution: With the goodwill now fully written off, management still offered no strategic decision on the trucking subsidiary, only continued "efficiency" language. A returns-focused CEO's silence on a twice-impaired asset is notable.
5. The third leadership change in under a year went unframed as a risk: Kevin Boone moving back to CFO and a new commercial chief is presented as optimization, but the cumulative turnover (CEO, CFO, CCO all changed within a year) is an execution risk management did not acknowledge.

Market Reaction

• Pre-print setup: CSX closed at $35.78 on January 22, having pulled back into the print, down 1.3% year-to-date and down 2.2% over the trailing 30 days, off the Q4 2025 highs near $37.39.
• Next-day session (Jan 23): Gapped up roughly 3.3% to open at $36.96, then settled to close at $36.64 (+2.4%, +$0.86) on 1.9x average volume.

A textbook "soft print, strong guide, cheaper stock" reaction. The in-line-to-slight-miss quarter was already discounted by the pre-print pullback, and the market rewarded the 2026 guide, 200-300 bps of margin expansion and 50%-plus FCF growth off a conservative demand base, plus the best operating-stats quarter of the year. The +2.4% close, from a lower starting point than the Q3 reaction, is the better entry we flagged at the upgrade: the stock is no longer at a fresh high, and the forward case is now anchored by company guidance rather than deal speculation.

Street Perspective

Debate: Is the 2026 margin guide credible or optimistic?

Bull view: 200-300 bps of expansion is cost-and-pricing-led off a conservative no-macro-help base, with ~$100M-plus of non-repeating costs rolling off, 100-plus structural initiatives, positive RPU momentum, and a dealmaker-operator with a Praxair/Linde margin track record, it is more likely beaten than missed.

Bear view: CSX just missed its own Q4 "return to growth" promise, demand is soft with "no short-term catalyst," and a new CEO guiding aggressive margin expansion in his first full quarter is setting a bar he may struggle to clear if volumes stay flat.

Our take: The bull has the better case. The guide deliberately assumes no volume help, so it is a cost-and-price story management controls, and the conservative framing plus Angel's record skews the risk to the upside. We treat 200-300 bps as a floor, not a ceiling.

Debate: Does the M&A de-emphasis remove a key support?

Bull view: Anchoring the case on a guided standalone inflection is healthier than relying on takeout speculation; the M&A option is still there, just longer-dated, so investors get the earnings recovery now and the deal optionality for free.

Bear view: A meaningful slice of the stock's 2025 rerating was merger premium; if Angel is signaling a deal is years away or unlikely, that premium could deflate, capping upside even if the earnings recovery delivers.

Our take: The premium risk is real but modest, and it is outweighed by the improved quality of the standalone case. We would rather own an Outperform underwritten by guided earnings than one propped up by deal odds. The optionality remains a genuine, if longer-dated, plus.

Debate: Is the trough behind the stock, or is 2026 another show-me year?

Bull view: 2025 was the kitchen-sink trough, hurricanes, projects, coal collapse, restructuring, all now behind it; 2026 has easy comps, a fluid network, positive pricing, lower capex, and a 50%-plus FCF inflection, the classic post-trough recovery setup.

Bear view: Management has guided a recovery for three straight quarters and the top line keeps disappointing; until industrial demand actually turns, 2026 is another self-help-only year with limited volume leverage and real macro risk.

Our take: Both are partly right, the self-help legs are de-risked and credible, the volume leg remains a show-me. But the risk/reward at a pulled-back price, with a conservative guide and FCF inflecting, favors owning the recovery rather than waiting for the volume proof, which would arrive only after the multiple has rerated.

Model Update & Valuation Framework

Valuation impact: At $36.64, CSX trades around 21-22x trough 2025 adjusted EPS but roughly 19x a guided-recovery 2026, and the free-cash-flow yield inflects sharply higher on the capex cut. For a best-in-class Eastern Class I with company-guided margin and FCF expansion and a free option on consolidation, that is a reasonable multiple for the quality. The key change from our Q3 upgrade is that the stock pulled back while the 2026 case got firmer and more concrete, improving the risk/reward we already liked. Our fundamental fair value, anchored on the guided 2026 earnings and FCF, sits above the current price, with the takeout scenario as additional, longer-dated upside.

Thesis Scorecard: Q3 2025 Signposts Revisited

Grading the standing thesis (last updated at the Q3 upgrade) against this quarter's print, guide, and call.

Overall: Thesis unchanged to modestly strengthened. The self-help inflection moved from aspiration to company guidance (the core Bull-1 pillar), pricing power emerged (Bull-2), and the valuation bear eased on the pullback, offsetting a softer Q4 print and a de-emphasized M&A pillar. The rating now stands on a guided standalone recovery rather than deal speculation, a sturdier foundation.

Action: Maintain Outperform. The pullback delivered the entry we flagged at the upgrade, and the 2026 guide quantifies and de-risks the inflection. Add on further weakness. Downgrade triggers: a guided-margin shortfall as the year unfolds, a pricing rollover, or evidence the cost program is stalling.