By Al Root

Railroads were the tech trade of the mid-19th century, and while they'll never regain that stature, they're suddenly interesting again. A sudden urge to merge will do that to a sector that includes Union Pacific, Norfolk Southern, and CSX.

Trains are typically far more interesting to five-year-olds than to investors. Sure, they're essential -- responsible for shipping cars, coal, and corn -- but as long as showrooms and shelves are filled, they're rarely deserving of much thought. That changed in July, when Union Pacific and Norfolk Southern agreed to merge, creating the possibility of a truly transcontinental railroad.

Combining large railroads hasn't happened in more than a generation. The industry is relatively concentrated, and regulators frown on additional consolidation, though they did allow two smaller railroads to merge to become Canadian Pacific Kansas City in 2023. You have to go back to the 1999 joint purchase of Conrail by CSX and Norfolk to find another example.

But if the merger is allowed to happen, the acquisitions likely won't end there. CSX would be the next likely target for either a Canadian railroad or Berkshire Hathaway's BNSF, which Warren Buffett's company bought in 2010. The stock has already benefited from the speculation, with shares up about 8% since Semafor reported that Union Pacific was looking for a merger partner in mid-July.

CSX could just wait to see how things play out, but activist investor Ancora doesn't think that's the best strategy. This past Tuesday, it released a letter it sent on Aug. 6 to CSX, demanding that the railroad's management pursue merger talks with BNSF Railway and Canadian Pacific Kansas City. It blasted the company for passivity, weak financial and operational performance, and poor decision-making.

CSX isn't "moving with the kind of urgency they need to today," Ancora portfolio manager Jim Chadwick tells Barron's. He believes the Trump administration would be willing to approve railroad mergers. The next administration might not. Being shut out of railroad mergers, after Union Pacific and Norfolk combine, would leave CSX competitively disadvantaged against a much larger foe.

The letter, which was initially private, was intended to be a "kick in the pants," Chadwick adds. CSX said in an emailed statement that it welcomed all ways to enhance shareholder value.

Not everyone agreed with Ancora's aggressive approach. The "letter to CSX strikes us as unnecessarily aggressive, possibly counterproductive," writes Citi analyst Ariel Rosa, adding that Ancora's claims of anemic returns are "difficult to reconcile with reality." Rosa points out that CSX is tied for the best share-price performance among large railroads since CEO Joseph Hinrichs joined the company in 2022.

Ancora does have a point about the administration, which has shown a willingness to allow mergers that the previous one didn't. Ancora, for instance, demanded a new U.S. Steel CEO and the abandonment of attempts to merge with Japan's Nippon Steel, but supported the acquisition once it recognized the president's willingness to approve it.

While Rosa might not agree with Ancora's approach, he still has a Buy rating on CSX, with a $40 price target, up 11% from recent levels. Others on Wall Street see an opportunity, too. TD Cowen and Deutsche Bank both upgraded CSX shares to Buy in July as the Union Pacific--Norfolk news unfolded.

However it happens, CSX is likely to find itself in the crosshairs of an acquirer. That won't be bad for the shares. If nothing happens, investors will have a railroad stock trading for about 18.5 times estimated 2026 earnings, right in line with its historical valuation.

Deal upside with limited downside. That sounds like a reasonable trade.

Write to Al Root at allen.root@dowjones.com

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August 22, 2025 21:31 ET (01:31 GMT)

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