CSX Looks Solid Despite The Slowdown

CSX Corporation (NYSE:CSX) reported its earnings for Q3, 2012 on October 16 and the results were more or less in line with our expectations. Double-digit growth in automotive and intermodal freight volumes helped offset coal and agriculture volume declines. The shift from heavy reliance on coal to other divisions gained traction again this quarter as a coal freight revenues declined by 17% but overall revenue only declined by 2%. ^[1] The company did post some year-over-year improvements in efficiency, which, in our opinion, will be a key in helping CSX work through this slowdown. Overall, we believe that, in addition to improving the efficiency, strengthening of segments other than coal is going to be the primary focus for CSX in the near term.

See our complete analysis of CSX here

Highlights

During the third quarter CSX reported a decline in revenue of 2%, which was driven primarily by lower volume in its agriculture freight and coal freight segments. The company reported a decline in operating income of 3% year-over-year as the operating ratio increased four-tenths of a percent to 70.5% from 70.1%. The small increase in operating ratio doesn’t concern us much because the number is essentially flat; CSX has show us that it can cut costs as revenues decrease.

Growth Likely to Remain Low in Near Term

CSX’s growth, like growth for any other railroad company, is correlated with the growth of the global economy. Unfortunately, for the next year or so global economic growth is expected to “slow and bumpy.” The IMF cut its global growth forecasts to 3.6% down from an estimate of 3.9% in June, with warnings about the risks of future cuts. ^[2]

CSX Efficiency Gains Can Help Handle Slowdown

While CSX’s operating income declined 3% during the quarter, it posted a much better number than competitor Norfolk Southern (NYSE:NSC), which expects an earnings decline of 25%. In our pre-earnings article we stated that we would be looking for efficiency gains across CSX’s network, and the company did not disappoint on this front. On-time originations and arrivals increased to 90% and 80%, respectively. Additionally, terminal dwell decreased to 23.2 hours from 25.5 hours and velocity increased to 23 mph from 21 mph year-over-year.  If CSX is able to maintain or improve these gains going forward, we could see an improvement in its operating ratio.

Coal and Agriculture Revenues Disappoint

As expected, revenues from the coal and agricultural segments of CSX’s business proved to be a disappointment during the quarter. Agricultural product revenues decreased 6%, driven by an 8% decline in volumes, and were partially offset by an increase in revenue per unit. The decline in volume was caused by severe drought conditions in the Midwest which led low harvest levels.

Coal revenues declined approximately 17% due to a 16% decline in coal freight volume and a 1% decline in revenue per unit. The declines were primarily driven by softening global demand, a trend which is likely to persist over the next year. A positive for the company on this front was that an increase in US thermal coal exports to Europe partially offset the decline in overall volumes.

Automotive and Intermodal Shine

The two bright spots for the company were Automotive and Intermodal revenues, which increased 18% and 10% respectively. Automotive freight revenue primarily increased due to higher vehicle production, which has seen increases to meet pent up demand created by the high average vehicle age in the US. However, as individuals continue replace old vehicles, we might see growth in this segment moderate going forward since vehicle’s are not a commodity purchased by an individual customer on a recurring basis.

Intermodal revenues increased due to an 8% increase in volumes and 2% increase in pricing. According to the company, domestic growth was the consequence of highway-to-rail conversions and more demand from business partners.

Conclusion

Overall, we think that CSX has done a good job in an environment which will see its competitor NSC post a huge earnings decline of 25%. We think that the slow growth expected in the global economy is likely to keep CSX’s growth opportunities at bay, but the company’s revenues could grow during the US holiday season. In our opinion, management must continue to focus on maintaining efficiency gains as overall coal freight weakness will have a downward impact on revenues.

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1. 10-Q, SEC [↩]
2. IMF cuts global growth forecasts, Financial Times [↩]