CSX Posts Modest Growth Despite Weaker Export Coal Market

CSX Corporation (NYSE:CSX), a leading railroad company in the eastern U.S., posted net earnings of $535 million in Q2 2013, which represented an y-o-y increase of 4%. Its revenue rose by 2% annually to about $3.1 billion, driven by 1% gain in overall volume, coupled with 1% increase in average revenue per unit. Its operating ratio improved slightly by 10 basis points annually to 68.6%.

CSX expects neutral to favorable market conditions for 83% of its volumes in the third quarter with the overall volume outlook stable to slightly positive. The chemicals, automotive and intermodal businesses are expected to see continued high demand in the future. The ongoing recovery in the construction sector will boost shipments of building products and aggregates (which includes crushed stone, gravel and sand). The agricultural market is expected to show a recovery in the second half of 2013, as crop output is likely to be higher. Headwinds in the coal market are expected to remain due to soft demand for U.S. coal exports and elevated coal inventory levels at southern utilities.

While CSX previously forecast EPS in 2013 to be flat to slightly down compared to 2012, it now expects it to be in line with the previous year. Apart from the challenges in the coal market, the company will face negative y-o-y impact from certain real estate transactions and liquidated damages in the second half. We are encouraged by the earnings growth during the second quarter, and we believe these estimates by the company’s management are conservative.

See our complete analysis of CSX here

Export Coal Market Presented Challenges In The Second Quarter

CSX’s coal revenue declined by 6% annually during the quarter due to 23% drop in export coal volumes. ^[1] Weak demand for U.S. thermal coal on account of economic challenges in Europe and oversupply in the international market contributed to this decline. The export coal market is expected to remain a challenge for CSX throughout 2013, as the company forecasts a 16% annual drop in export coal volumes in 2013.

In a change of trend, CSX’s domestic coal volumes rose by 5% annually during the second quarter after several quarters of declines due to the increase in natural gas prices and easier y-o-y comparisons. ^[1] While this is encouraging, the company still forecasts domestic coal volumes to fall by 5%-10% in 2013. Coal inventory levels at southern utilities remain above normal levels, and hence this is expected to impact coal demand in the future.

Waste And Equipment, And Agricultural Products Shipments Also Saw A Decline

CSX’s waste and equipment revenue decreased by 11% during the second quarter as shipments of military and machinery equipment fell due to government budget constraints and other factors. This was partially offset by increased volumes of waste products, which was driven by a recovery in the construction sector.

CSX’s agricultural products’ revenue dropped by 5% in Q2 2013 as last year’s drought continued to impact shipments of feed grain and soybeans. Ethanol shipments were also hit due to reduced demand for gasoline in the U.S. and lower production. However, CSX’s revenue from phosphates and fertilizers shipments rose by 8%, offsetting the decline in agricultural products. We expect the agricultural segment to post strong growth in the second half of 2013, on account of higher anticipated crop yield.

Growth In Chemicals, Automotive And Intermodal Volumes Drove Revenue Increase

CSX posted strong growth in chemicals, automotive and intermodal businesses where revenues rose by 11%, 5% and 4% respectively during the second quarter.

Strong demand in the chemicals business due to increasing shipments of crude oil, liquefied petroleum gas (LPG) and frac sand continues to drive growth for CSX. We expect the positive outlook for this market for the rest of 2013, on account of growing oil and gas industry in North America.

Higher automotive shipments were driven by a 5% annual increase in North American light vehicle production. We expect strong demand in this market to continue for the rest of 2013. However, difficult y-o-y comparisons could impact growth rate in the future.

The intermodal segment represents a long term growth driver for CSX as there exists 9 million domestic truck to rail conversion opportunity in this market. While CSX’s domestic intermodal volumes rose by 4%, international volumes growth was slower at 1% due to carrier port shifts. ^[1] We expect CSX’s intermodal volumes to grow at 3%-5% annually over our forecast period driven by continued truck to rail conversions and the company’s initiatives to enhance its capacity in this segment.

Housing Recovery And Increased Construction Activity Are Driving Shipments Of Forest Products And Minerals

Due to the ongoing recovery in the housing market and increased construction activity in the U.S., CSX witnessed increased shipments of building products and aggregates. CSX’s revenue from shipments of forest products and minerals increased by 6% and 7% during the quarter. We expect this market to stay favorable for CSX for the rest of the year fueled by the recovery being seen in the construction sector.

We are in the process of revising our $23 price estimate for CSX’s stock.

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1. CSX’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 17, 2013 [↩] [↩] [↩]