# CSX Corp. (NASDAQ:CSX)

## Present Value of Free Cash Flow to Equity (FCFE)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

CSX Corp., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.18%
01 FCFE0 2,948
1 FCFE1 3,523 = 2,948 × (1 + 19.50%) 3,112
2 FCFE2 4,113 = 3,523 × (1 + 16.74%) 3,210
3 FCFE3 4,688 = 4,113 × (1 + 13.99%) 3,233
4 FCFE4 5,215 = 4,688 × (1 + 11.24%) 3,178
5 FCFE5 5,658 = 5,215 × (1 + 8.49%) 3,046
5 Terminal value (TV5) 130,714 = 5,658 × (1 + 8.49%) ÷ (13.18%8.49%) 70,369
Intrinsic value of CSX Corp.’s common stock 86,148

Intrinsic value of CSX Corp.’s common stock (per share) \$38.21
Current share price \$30.21

Based on: 10-K (filing date: 2021-02-10).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.84% Expected rate of return on market portfolio2 E(RM) 11.82% Systematic risk of CSX Corp.’s common stock βCSX 1.14 Required rate of return on CSX Corp.’s common stock3 rCSX 13.18%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rCSX = RF + βCSX [E(RM) – RF]
= 1.84% + 1.14 [11.82%1.84%]
= 13.18%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

CSX Corp., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 30, 2016
Selected Financial Data (US\$ in millions)
Common stock dividends 797  763  751  708  680
Net earnings 2,765  3,331  3,309  5,471  1,714
Revenue 10,583  11,937  12,250  11,408  11,069
Total assets 39,793  38,257  36,729  35,739  35,414
Shareholders’ equity, attributable to CSX 13,101  11,848  12,563  14,705  11,679
Financial Ratios
Retention rate1 0.71 0.77 0.77 0.87 0.60
Profit margin2 26.13% 27.90% 27.01% 47.96% 15.48%
Asset turnover3 0.27 0.31 0.33 0.32 0.31
Financial leverage4 3.04 3.23 2.92 2.43 3.03
Averages
Retention rate 0.75
Profit margin 28.90%
Asset turnover 0.31
Financial leverage 2.93

FCFE growth rate (g)5 19.50%

Based on: 10-K (filing date: 2021-02-10), 10-K (filing date: 2020-02-12), 10-K (filing date: 2019-02-06), 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-14).

2020 Calculations

1 Retention rate = (Net earnings – Common stock dividends) ÷ Net earnings
= (2,765797) ÷ 2,765
= 0.71

2 Profit margin = 100 × Net earnings ÷ Revenue
= 100 × 2,765 ÷ 10,583
= 26.13%

3 Asset turnover = Revenue ÷ Total assets
= 10,583 ÷ 39,793
= 0.27

4 Financial leverage = Total assets ÷ Shareholders’ equity, attributable to CSX
= 39,793 ÷ 13,101
= 3.04

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.75 × 28.90% × 0.31 × 2.93
= 19.50%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (68,108 × 13.18%2,948) ÷ (68,108 + 2,948)
= 8.49%

where:
Equity market value0 = current market value of CSX Corp.’s common stock (US\$ in millions)
FCFE0 = the last year CSX Corp.’s free cash flow to equity (US\$ in millions)
r = required rate of return on CSX Corp.’s common stock

#### FCFE growth rate (g) forecast

CSX Corp., H-model

Year Value gt
1 g1 19.50%
2 g2 16.74%
3 g3 13.99%
4 g4 11.24%
5 and thereafter g5 8.49%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 19.50% + (8.49%19.50%) × (2 – 1) ÷ (5 – 1)
= 16.74%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 19.50% + (8.49%19.50%) × (3 – 1) ÷ (5 – 1)
= 13.99%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 19.50% + (8.49%19.50%) × (4 – 1) ÷ (5 – 1)
= 11.24%