CSX Earnings Will Show A Mixed Picture But Fundamentals Are Intact

by Trefis Team
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CSX Corporation
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CSX Corporation (NYSE:CSX) is going to release its quarterly results for Q2, 2012 on 17th July, and we expect to see the results of a decline in coal freight volumes during the quarter. This could be partly offset by its industrial freight division as petroleum and petroleum products grew by a staggering 47.9% y-o-y during the quarter, and the automotive sector benefited heavily from a 24.6% y-o-y growth in the motor vehicle & parts freight, as per data reported by Association of American Railroads. [1] Agricultural freight slid because of reduced grain volumes, but Intermodal freight continued its steady growth in Q2. We expect mixed results for CSX this quarter. Lets look in more detail the emerging trends that are expected to impact CSX’s earnings and valuation.

We have a $25 price estimate for CSX, which is around 10% above the current market price.

See our full analysis for CSX here

Industrial freight and Intermodal to drive growth

Overall U.S. freight rail carloads has been declining quarter over quarter while intermodal freight has gradually grabbed more of the freight share at the expense of U.S. rail traffic. During Q1, total carloads declined by 3.2%, where as intermodal volumes increased by 4%.

This transition in U.S. freight traffic from railroad to intermodal is going to have a significant impact on CSX’s Q1 earnings as well as value because CSX derives nearly 13% value from its Intermodal freight division. Its imperative for CSX to invest heavily on intermodal facilities.

In Q1 10-Q filing, CSX mentioned about ongoing intermodal expansion plans that includes a new intermodal terminal in Louisville, Kentucky and major terminal expansion projects in Worcester, Massachusetts and Columbus, Ohio. We expect, CSX to have spent considerably in intermodal facilities even in Q2. CSX directly competes in the east coast with Norfolk Southern (NYSE:NSC), which gets higher revenues from intermodal freight compared to CSX. We expect CSX to report sound revenue growth in intermodal freight in Q2 and gain market share in U.S. rail intermodal units going forward.

CSX’s industrial freight division caters to transportation of petroleum products, automotives (finished products and parts), plastics, primary metals, and housing & consumer goods. Petroleum products and automotive goods had a phenomenal growth during the quarter, which would drive revenues for this division. Moreover, overall consumption pattern improved across the nation as evidenced by a marked improvement in housing starts in the quarter. Housing pattern has a spillover effect on other sectors also because it drives growth for other goods such as furniture, appliances and petrochemical products. Primary metals, however, had a quiet quarter. Overall, we believe industrial freight, which contributes nearly 28% value to the company, will show tremendous revenue growth this quarter and help CSX gain market share.

Agriculture and Coal could hurt

Results in Agricultural freight is likely to be affected adversely, particularly due to fall in grain carloads. Grain transportation is either for animal feed or for export and export demand declined significantly during the quarter. On the other hand, coal demand declined significantly due to low natural gas prices that led power producers to increasingly switch to gas fired plants from coal-fired. Coal carload reduced by 11.7% while grain carload declined by 13.2% during the quarter. We expect, these two divisions – agriculture and coal – will hurt CSX the most in Q2.

Long-term prospects intact

The U.S. GDP and freight rail traffic have traditionally demonstrated close correlation as 70% of the U.S. GDP is based on personal spending, which drives volumes of consumer goods. For Q1, 2012 we saw U.S. GDP grow by only 1.9%, but performance for the rest of the year could pick up.

For specific trends, the domestic coal demand is likely to increase gradually as gas prices increase and attractiveness of coal revives. Nevertheless, if domestic coal demand remains subdued, exports along the east coast will drive volumes. While CSX may have mixed earnings this quarter, the long term prospects for the company are intact. In the long term, CSX will have to look beyond coal freight to drive growth. Presently, coal freight’s contribution to CSX’s value is nearly 30%, which is the maximum among all divisions.

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Notes:
  1. AAR Rail Time Indicators Report, aar.org []
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