- CSX’s overall volumes grew by around 1% annually during the first nine weeks of Q2 2013 compared to the negative growth witnessed in Q1 2013.
- CSX saw volume growth in all the segments except the export coal market during this period. The export coal market is expected to be a headwind for CSX in 2013 as CSX’s export coal volumes are estimated to decline by 16% annually in 2013.
- Domestic coal, agricultural, and housing and construction markets saw recovery during the first nine weeks of Q2 2013. While the recovery in CSX’s domestic coal volumes seems encouraging, the overall domestic coal volumes are estimated to decline by 5%-10% annually in 2013.
- Owing to these challenges, the outlook for CSX’s earnings per share growth in 2013 is discouraging.
CSX Corporation (NYSE:CSX) is among the leading railroad companies in the eastern U.S. Its management recently presented at the Deutsche Bank global industrials and basic materials conference on June 12. CSX reported that its overall volume rose by around 1% annually during the first nine weeks of Q2 2013, ending May 31, 2013, as compared to a 2% decline in Q1 2013.
In the industrial segment (which includes chemicals, automotive, and metals), CSX saw a healthy y-o-y volume growth of 4% during this period on account of strong growth in chemicals shipments. In an encouraging sign, CSX’s domestic coal volumes, agricultural volumes, and housing and construction volumes witnessed an increase during the first nine weeks of Q2 2013 after posting a decrease in Q1 2013.
The coal market is expected to remain a headwind for CSX throughout this year. In 2013, CSX estimates domestic coal volumes to decline by 5%-10% annually and export coal volumes to decrease by around 16% annually. Pricing in the export coal market will face further pressure by low international prices of coal and the need to keep U.S. coal competitive in the world market. On account of such challenges, CSX estimates earnings per share in 2013 to be flat to slightly down compared to the prior year.
Performance Of CSX’s Different Segments During The First Nine Weeks Of Q2 2013
|Segment||% Contribution in 2012 Revenue||Y-o-Y Change in Volume in Q1 2013||Y-o-Y Change in Volume in the first nine weeks of Q2 2013 (ending May 31, 2013)|
|Housing and Construction||12%||(1)%||2%|
Growth in intermodal segment is being fueled by domestic intermodal business
- The intermodal segment accounted for around 38% of CSX’s overall volume in 2012. This business is fairly split between domestic and international intermodal business.
- During the first nine weeks of Q2 2013, CSX’s intermodal volumes were up by 2% on account of 4% growth in domestic business and 1% growth in the international business.
- The intermodal business represents a long-term growth driver for CSX, and the management estimates truck to rail conversion opportunity in the eastern region at 9 million truckloads. CSX is expanding and opening new terminals to enhance its capacity in this segment.
Growth in chemicals business is driving the industrial segment
- CSX’s industrial volumes saw 4% y-o-y growth during the first nine weeks of Q2 2013 driven by rapid growth of chemical shipments. Increased shipments of crude oil and frac sand contributed to this volume growth.
- Going forward, we expect the high demand to continue in the chemicals business on account of rising crude oil transportation by rail. Additionally, the shale gas boom being seen in North America is also driving shipments of chemicals and plastics.
Housing and Construction sector is seeing a rebound
- CSX’s housing and construction volumes saw 2% growth during the first nine weeks of Q2 2013 compared to 1% volume decline in Q1 2013. The ongoing housing recovery is contributing to increased shipments of aggregates (which includes crushed stone, sand and gravel).
- While housing starts remain lower than the average 1.5 million recorded during 1960-2010, they grew by 44% and 13% annually respectively, in March and April 2013. 
- We expect this segment to see increased volumes during the rest of the year fueled by recovery in the housing market.
Growth in phosphate and fertilizer business is driving the agricultural segment in the second quarter
- CSX’s agricultural segment saw positive volume growth during the first nine weeks of Q2 2013 compared to a 5% volume decline in Q1 2013. Strong growth in phosphate and fertilizer shipments drove this segment during the period.
- We expect CSX’s agricultural segment to post higher growth in the second half of 2013 driven by easier y-o-y comparisons and the recovery in crop output.
Domestic coal market shows recovery in Q2 2013
- CSX’s domestic coal volumes grew positively during the first nine weeks of Q2 2013 compared to a sharp fall in Q1 2013. The recovery came about on account of an increase in natural gas prices which led to increased shipments from coal basins such as the Powder River basin and Illnois basin. Easier y-o-y comparisons also contributed to the annual volume growth.
- While domestic coal volumes have improved in Q2 2013, CSX still forecasts it to decline by 5%-10% annually in 2013.
- CSX’s domestic coal volumes are expected to drop in the second half of 2013 compared to the prior year on account of increased coal inventory levels at utilities and difficult y-o-y comparisons.
Export coal volumes a laggard in 2013
- Export coal volumes have been a painful point for CSX in 2013. During the first nine weeks of Q2 2013, CSX’s export coal volumes dropped by 16% after declining by 3% in Q1 2013. The recent weakening of coal prices in the international market led to lower coal exports. In addition, difficult y-o-y comparisons also contributed to the sharp annual drop.
- While CSX transported around 48 million tons of export coal in 2012, it estimates export coal volumes to drop by 16% in 2013 to around 40 million tons. 
Our $23.10 price estimate for CSX represents near 5% downside to the current market price.Notes:
- Housing Starts, Mortgage News Daily [↩]
- CSX Corporation’s CFO Presents at Deutsche Bank Global Industrials and Basic Materials Conference (Transcript), Seeking Alpha, June 12, 2013 [↩]