EFTA01387107.pdf

22 February 2018 Trucking U.S. Transportation Figure 3: ODFL NTM PIE relative to the S&P 2.5x 1.4x 1.3x 0.9x 0.8x is en en 01 en me es es O N N YI .11 on ID f, h N A 0) H.OgAi Relative FIE gUIEU-TiaThE dev • Mean -*/- 1 std $01/re Orlatht art Rails - Cash return key driver of equity value: With a relatively benign volume and pricing environment for rails (puts and takes on mix offset by pricing power from industry structure and truckload tightening), the key driver for rail stocks, in our view, is FCF growth over-and-above book EPS growth (i.e. >100% incremental fcf conversion) and share buybacks. From this perspective CSX screens the most favorable to us (hence our top rail pick), with mgmt. recently pointing to repurchasing 558 of its own shares (10% of market cap) over the next 12 months. This, coupled with ambitious OR targets, translates to even higher EPS power in 2020 (our 2020 EPS estimate of $4.65 translates to 27% EPS CAGR vs. 2017 and even higher on a FCF basis given lower capex, which under any reasonable valuation scenario equates to much higher equity value). Figure 4: CSX yoy EPS growth vs. yoy FCF growth 140% 116% 120% 100% SO% 60% 40% 20% 33.6% 0% (20%) 2013 2014 2015 2016 2017 2018E -YOY dung/ in book EPS ---Yor change rcr sane Onothe So* Cong., AIV, Deutsche Bank Securities Inc Page 5 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0089208 CONFIDENTIAL SDNY_GM_00235392 EFTA01387107