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CSX Turnaround Largely Reflected in Stock Valuation, Morgan Stanley Says in Downgrade

-- CSX's (CSX) turnaround efforts are going well, but they are largely reflected in the stock's valuation, Morgan Stanley said in a note e-mailed Thursday.

Late Wednesday, the rail-based freight transportation supplier reported stronger-than-expected first-quarter earnings, while its revenue fell just short of Wall Street's projections. The company achieved the results as it advanced its efforts to improve efficiency and streamline cost structure, Chief Executive Steve Angel said on an earnings conference call, according to a FactSet transcript.

"Execution under new CEO Angel is progressing well, with productivity gains, improving efficiency, and a sizable project pipeline supporting volume growth into the cycle," Morgan Stanley said in a note to clients. "However, we believe this turnaround is now largely reflected in both estimates and the stock."

The brokerage downgraded its rating on the CSX stock to underweight from equal-weight while keeping its price target at $30.

CSX shares were up 7% in Thursday late-afternoon trade, bringing its year-to-date gains to 27%.

Although the company's recovery is going well, the stock has run "too far, too fast," Morgan Stanley said. "Without incremental positive surprises, we see downside risk, particularly as expectations build and competition from truck intensifies deeper into the cycle."

The brokerage said it sees any "tangible" merger and acquisition developments as unlikely before late next year, limiting the company's relevance in the near term.

"We will closely track the pace of productivity gains and pipeline conversion, but we also see truck competition intensifying (versus) rail as we push deeper into the upcycle and better risk-reward at other rails," Morgan Stanley said.

Railroad operator Union Pacific (UNP) affirmed its full-year earnings outlook Thursday, while its first-quarter bottom-line topped the Street's estimates.

Price: $45.95, Change: $+2.77, Percent Change: +6.40%

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