CSX delivered a terrific second quarter; although revenue decreased 12% due to freight volumes dropping, CSX still managed to crush analyst expectations of $0.44 with a $0.47 EPS. This beat, can be attributed to management,s operational efficiency efforts and reducing costs where the company could. CSX focused on what it could do in times of turmoil. The company took a long-term view and decided to invest in initiatives that would relieve short-term pain of declining volumes, as well as drive huge value for investors in the long-term. Once commodities do rebound and volumes increase, we can expect CSX’s investment initiatives to deliver outstanding results. This is why  the current rally is the real deal, and is only the start of what looks to be a sustained rally to new highs.

CSX’s operational efficiency measures have shown to work in Q2. Coal demand was expected to be weak for Q2, as volumes were down a whopping 34% in Q2. But CSX did what it could to weather the storm. Expenses decreased by 9% YoY, which saved the company an additional $183 million. Total savings are near $350 million and are expected to increase with greater momentum as we head into the latter part of 2016. While its initiatives were not enough to completely offset the weakness in freight volumes, they still were enough to allow CSX to beat analyst expectations.

CSX is focused on long-term project and if you’re an investor with an investment horizon over five years, there is no doubt that CSX will deliver fantastic value to you. It’s been quite a rally from the bottom, but the stock is still very cheap at current levels and there is a fair margin of safety. The P/B and P/CF are at 2.3 and 8.1, respectively, both of which are lower than its five-year historical average values of 2.8 and 9.1, respectively. CSX has a fantastic operating margin of 30.2% thanks to its long-term investments in improving efficiency. The operating cash flow is at 2.1x net income with a 12.6% free cash flow margin. This is quite impressive considering the headwinds that the entire rail sector is facing. Such a strong free cash flow position could imply a dividend hike in one of the remaining 2016 quarters.