CSX Corporation (NYSE:CSX) will be first among the U.S. Class I railroads to release its first quarter earnings to be announced on April 18. Railroads companies are often considered a barometer for economic health, and we expect the company to post good 1Q results as the U.S. economy shows a stronger pulse. Earnings might get a boost from an increase in volumes of automotive and industrial products, complemented by improved operating efficiency due to the relatively warmer weather. Core pricing gains and higher fuel prices will also bode well for the earnings. However, a dip in coal volumes will upset CSX most as it carries more coal than any other major U.S. railroad company. The company and its competitors including Union Pacific Corporation (NYSE:UNP) and Norfolk Southern Corporation (NYSE:NSC) saw double-digit growth in revenues and earnings last year.
Our price estimate for CSX is $27, which is around 25% above the current market price.
Stronger economy to boom traffic volumes, coal to suffer
The U.S. economy has shown encouraging signs of a recovery, and we expect this to translate into higher traffic volume mainly in automotive and industrial products, which will result in greater revenue and earnings. Coal is one of the largest contributors to CSX revenues and makes up about 32% of our price estimate for the company and could however dampen the mood. Until now, coal has dominated carloads volumes; however, its usage in electricity generation suffered a major blow following the Environmental Protection Agency ’s new regulations that virtually bar new coal-fired power plants. The all-time low natural gas prices are also driving utility away from coal.
In the last three quarters of 2011, railroads saw an improvement in pricing, and we expect this trend to continue in the first quarter too. A rise in fuel surcharges due to an increase in fuel prices will likely have a positive impact on the railroad’s revenues. Mild winter also resulted in improved operational efficiency in the first quarter.
Long term outlook strong
In the near term, a rise in coal exports may not be able to replace the slack in demand from domestic users. However, the trend is changing and coal is expected to have a smaller fraction of its overall business. Other commodities such as agricultural, industrial and consumer products will likely drive the company’s volumes and profits in the future.
Overall, we expect CSX to maintain the growth momentum as it continues to make capital investments required for growth.