In its first quarter earnings announcement last Wednesday, CSX Corporation (NYSE: CSX) reported an increase in revenue, operating income and volumes in addition to improvements in operating metrics such as on-time originations and arrivals. The results were in line with our expectations as increasing volumes for automotive, metals and intermodal offset the decline in coal volumes. Favorable product mix, core pricing gains and higher fuel prices also benefited the company. Railroad companies are often considered a barometer for economic health, and strong results by the railroads is generally thought to mean a strong pulse in the U.S. economy. We expect other major freight carriers, such as Norfolk Southern Corporation (NYSE:NSC), and Union Pacific Corporation (NYSE:UNP), to continue the earnings trend set by CSX, with Union Pacific in particular reporting strong numbers due to intermodal transport.
We have revised our price estimate for CSX to $28, which is around 25% above the current market price. Our revision reflects the near term weakening domestic coal demand in the U.S and other items.
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Improvement on All Fronts
For the first quarter, the company reported a 6% year-over-year increase in revenues, totaling $2.99 billion. Operating income jumped to $856 million in the first quarter, while net income rose by 14% to $449 million. Overall total volumes were up 1% on a year-over-year basis. The fourth quarter saw an 18% increase in automotive volume, while coal volumes dipped 14%. Intermodal volumes increased by 9% as truck conversions continued. Nearly all segments witnessed increases in revenues due to pricing improvements.
The company also reported improvements in operating metrics compared to the first quarter of 2011, with on-time originations and arrivals increasing to 89% and 77%, respectively, and terminal dwell time improving to 24 hours. 
Bullish Long Term Outlook
The company has a bullish outlook going forward with many encouraging economic indicators. We expect coal volumes to keep declining in the near term before coal exports begin to surpass the decline in domestic demand. However industrial, consumer and agricultural products will likely drive the company’s volumes and profits in the future.
We expect CSX to maintain its focus on improving its performance efficiency. The company is also investing in enhancing its infrastructure as well as its terminal and intermodal capacity. These expenditures will bear a long term benefit for the freight carrier as it competes with other railroads.Notes: