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Nov 1, 2016

S3 BLACKLIGHT: A Convoy of Short Sellers Roll onto CSX

CSX Corp. (CSX US) short interest jumped 219%, to $1.5 billion after CSX reported 3rd quarter results on October 12th. In comparison, CSX’s 2016 average short interest prior to the 12th was $288 million and 2015 average short interest was $330 million.

CSX reported EPS of $0.48 and even though that beat estimates by $0.03 it was below 3rd quarter 2015 results by $0.04. The main cause of CSX’s miss was a significant drop in coal transport revenue which declined 20% in the 3rd quarter. Coal transport makes up 17% of CSX’s revenue and has been declining for years as demand for the fossil fuel wanes.

In total, CSX’s 3rd quarter revenues declined 8% on a year on year basis, but were partially offset by a 7% year on year reduction in overall expenses. Unfortunately, expense reductions have a finite floor while commodity pressures can continue to hurt CSX’s bottom line for years.

Overall, U.S. railroad traffic is down 1.7% this year which explained weak sales growth in other areas, but CSX’s second most active product line, intermodal traffic, was down 3.1% nationwide. Intermodal traffic made up 16% of CSX’s revenue stream. To compound the overall lack of intermodal traffic their competition from the trucking industry increased as lower oil and gas prices drove down trucking rates.

With one third of CSX’s revenue stream, coal and intermodal, declining and further significant expense cutting becoming difficult to find, short sellers have found a fundamental reason to pile into the CSX trade. With the stock up 17% year to date and beating the S&P by 14%, a reversion back nearer to market level returns based on poor quarterly results looks enticing to short sellers. So enticing, that they put on $1 billion worth of new short positions in just over two weeks.

Because of CSX’s large float and institutional holdings, stock borrow costs are still at General Collateral levels, the cheapest borrow costs for the easiest to borrow names.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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