CSX Corporation (NYSE:CSX) is a leading railroad company in the eastern U.S. and is expected to report its Q1 2013 results on April 17, 2013. During the eight weeks ending February 22, 2013, CSX recorded an overall annual volume decline of 2%. While the coal market continues to be a major headwind for the company, growth in the intermodal and chemicals businesses could partially offset the decline in coal volumes. The automotive business is battling difficult y-o-y comparisons as growth has slowed down compared to last year’s high base. The agricultural and metals businesses could see some weakness in Q1 2013 due to unfavorable market conditions.
We expect pricing gains and efficiency to be the key factors for CSX’s earnings growth in 2013 as volumes continue to be impacted by unfavorable market conditions.
Recap of Q4 2012 Results
In Q4 2012, CSX recorded an annual revenue decline of 2% on account of a 3% drop in volume coupled with a 1% rise in average revenue per unit (RPU). Weakness in the coal and agricultural markets were partially offset by growth in the intermodal, chemicals and automotive businesses.
Operating Margin Will Be Closely Tracked In Q1 2013
CSX’s operating ratio had increased by 60 basis points annually in Q4 2012 to 72.1%. We will keep a close eye on CSX’s operating ratio this quarter as cutting costs and maintaining efficiency will be the key factors for railroads to post earnings growth this year as volumes continue to be affected by unfavorable conditions in several end-markets.
The firm expects to deliver around $130 million of productivity savings in 2013 following the $200 million savings it achieved last year. It will be interesting to see CSX’s progress due to these strategic initiatives this quarter.
Coal Market To Remain A Headwind In Q1 2013
Weakness in the coal market continues to be a major headwind for most railroad companies, including CSX. During the first eight weeks of 2013, CSX’s coal revenue was down by 16% due to a 14% drop in coal volumes along with a 3% decrease in coal RPU. Both domestic and export coal volumes declined by 17% and 6% annually respectively.
We expect weakness in the domestic coal market to continue in 2013 on account of competition from natural gas and high coal inventories. However, the recent rise in natural gas prices (at around $4 per million BTU) at the end of March 2013 augurs well for the coal market.  If this trend continues, we think the coal market could see a recovery once the coal inventory levels at utilities reach more normalized levels.
Chemical and Intermodal Businesses Are Growing For The Railroad Sector
Driven by higher truck to rail conversions and CSX’s investments to improve its service levels, the intermodal business continues to be a growth driver for CSX. Its intermodal revenue was up by 6% in the first eight weeks of 2013 driven by a 4% rise in volumes and 2% growth in RPU. We expect CSX to post healthy growth in this segment in Q1 2013 driven by increases in both domestic and international intermodal volumes.
The chemicals business is another growth segment for CSX. The company’s chemicals volumes rose by 11% during the first eight weeks of 2013. The changing energy landscape in the U.S. has benefited CSX’s chemical business. Growth in crude oil production coupled with an inadequate pipeline infrastructure has led to higher railroad shipments of crude oil and petroleum products. Moreover, the boom in the U.S. chemicals sector on account of low natural gas prices has driven an increase in shipments of industrial chemicals and plastics.
Other Merchandise Businesses Could Show Weakness
CSX’s automotive volumes, which grew by double digits last year were down by 2% in the first eight weeks of 2013. The segment is expected to grow at a slower rate in 2013 mainly due to difficult y-o-y comparisons. While the North American light vehicle production continues to grow, the growth rate is expected to slow down to around 3% in 2013 compared to about 18% growth last year.
CSX’s agricultural volumes are also expected to weaken in Q1 2013 on account of lower grain and ethanol shipments. During the first eight weeks of 2013, they dropped by 3% y-o-y owing to a decline in grain volumes which was partially offset by growth in phosphates and fertilizer shipments.
Our $22 price estimate for CSX is around 10% below the current market price.Notes: