Solid Execution but More Evidence Needed to Justify Risk-Reward

CSX reported a decent 3Q beat (6%/10% vs. consensus/MSe), driven largely by Other Revenue (23%/11% above MSe/cons.) and PS&O (3% below MSe/cons.) including an $11mm gain on sale, along with expectations resetting on fuel dynamics. Management cited continued productivity actions (expected to extend into 2027, albeit less strong than 2026) and improved operations after 2Q challenges, with record fuel efficiency in 3Q and October velocity above 19mph with dwell approaching 10 hours. FY26 revenue guidance was raised on higher fuel surcharge revenue while margin guidance was held, and capex guidance remains below $2.4bn with FCF growth expected to exceed 80%. We believe normalized EPS is somewhat north of $2 (our 2027-28 average is ~$2.30), and the stock trades comfortably north of 20x P/E versus our 15x long-term view. We remain Underweight with a $32 price target based on a 10-year DCF (7.3% WACC, 1.5% terminal growth), implying ~15x forward P/E. Risk-reward is now skewed to the downside: