CSX Corporation (NYSE:CSX) reported its earnings for Q4, 2012 on January 22, and the results were more or less flat. Revenues declined 2% as the company reported 18% decline in coal revenues, which were partially offset by a 15% increase in automotive revenues. These results again show that the company has to shift from its heavy reliance on coal to other freight divisions as coal volumes are expected to stay low for the foreseeable future.  Encouragingly, the company posted some efficiency gains as the firm’s operating ratio improved by 30 basis points to 70.6% for the whole year. We view this improvement in the operating ratio as encouraging and will watch this metric closely going forward because it will be important for CSX’s long term health. Additionally, in 2013, the company’s ex-coal segments will be important to watch since they will be an important driver of growth.
During the fourth 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 4% year-over-year as the operating ratio for the quarter increased 60 basis points of a percent to 72.1%. This increase in operating ratio during the quarter doesn’t trouble us too much because the company’s operating ratio for the year improved by 30 basis points.
Economic Concerns Will Be A Drag On Growth
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 be slow. Additionally, concerns about the Euro crisis and the U.S. fiscal situation could cause volatility in the in the world economy, which will in turn make CSX’s revenues volatile.
CSX Efficiency Gains Will Help Margins
While CSX’s operating income declined 4% during the quarter, it posted a much better number than competitor Norfolk Southern (NYSE:NSC), which posted a net income decline of 13%. In our pre-earnings article we stated that we would be looking for efficiency gains across CSX’s network, and the company repeated its impressive Q3 performance. On time origination and arrivals increased to 90% and 84%, respectively. These figures increase from 82% and 72% in Q4 2011. Additionally, terminal dwell decreased to 24.3 hours from 25.4 hours and velocity increased to 23 mph from 21 mph year-over-year. We think that these efficiency gains help the company keep a control on margins, and think that if CSX is able to maintain or improve on these gains going forward, we could see an improvement in its operating ratio.
Coal Declines Offset By Automotive And Intermodal Growth
As expected, revenues from the coal and agricultural segments of CSX’s business proved to be a disappointment during the quarter. Coal product revenues decreased 18%, driven by an 19% decline in volumes which was partially offset by a slight increase in revenue per unit. The decline in volume was caused by low natural gas prices, high inventory levels and low global demand. We expect these conditions to continue for the foreseeable future, and expect that the coal freight segment will continue to be a drag on CSX’s revenues.
While coal revenues disappointed, the two bright spots for the company were automotive and intermodal revenues, which increased 23% and 11% 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 U.S. However, as individuals continue replace old vehicles, we might see growth in this segment moderate going forward since vehicles are not a commodity purchased by an individual customer on a recurring basis. This is definitely something we will be closely watching over the year since automotive revenue has offset other declines during the past two quarters.
We currently have a $21 price estimate for CSX, which is approximately the same as the current market price.Notes: