CSX Corporation (NYSE:CSX) is a leading railroad company in the eastern U.S. It posted 2% annual revenue growth in Q2 2013, owing to 1% gain in overall volume and average revenue per unit each. Its revenue growth was impacted by lower shipments of agricultural products, coal, and military and machinery equipment. In this article, we analyze how the different market segments of CSX are going to perform in the second half of 2013. CSX estimates EPS in 2013 to be in line with the previous year, and we also evaluate the key factors that can lead it to under perform or over perform this goal.
CSX estimates neutral to favorable market conditions for 83% of its volumes during the third quarter and the overall volume outlook is stable to slightly positive. The coal market will continue to remain a major impediment for CSX’s growth in the near term. We expect the company to see profitability improvement in the future, partially driven by core pricing gains. However, we will also track negative y-o-y impact from certain real estate transactions and liquidated damages in the second half as these would influence bottom line growth.
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Coal Market Will Continue To Present Challenges
The coal market continues to be a major headwind for CSX. In Q2 2013, CSX faced 23% decline in export coal volumes due to weak demand from Europe and oversupply in the international market. CSX estimates 16% annual drop in export coal volumes in 2013, and hence, we believe this sector will continue to present challenges during the rest of 2013.
While CSX’s domestic coal volumes increased by 5% in Q2 2013, intense competition from natural gas and high coal inventory levels at Southern utilities will negatively impact rail transportation of coal during the rest of 2013. CSX estimates domestic coal volumes to decline by 5-10% annually in 2013. Accounting for around 17% of the total company volume, we believe coal volumes will remain challenging in the near term.
Agricultural Market Could See A Recovery
CSX faced decline in agricultural shipments during the first half of 2013, due to continued impact from last year’s drought, which led to lower feed grain and soybean shipments. We expect recovery in this market during the second half owing to higher anticipated crop yield.
Growth In Intermodal, Chemicals and Automotive Shipments Will Continue To Fuel Demand
The chemical and intermodal segments represent growth drivers for CSX. Chemicals shipments continue to grow at a healthy rate due to increasing shipments of crude oil, liquefied petroleum gas (LPG) and frac sand. We expect this trend to continue in 2013 on account of the expanding oil and gas industry in North America.
Owing to 9 million domestic truck to rail conversion opportunity in the eastern region and the company’s initiatives to enhance its capacity in this segment, we expect CSX’s intermodal volumes to rise in the future. Growth with international shipping partners will further spur the intermodal volumes.
We expect CSX’s automotive shipments to also remain high over the near term owing to continued growth in North American light vehicular production, however, difficult y-o-y comparisons could impact the future growth rate in this segment.
Housing Recovery Will Also Drive CSX’s Shipments
Housing starts account for around 6% of CSX’s overall volumes. We think the ongoing recovery in the housing market will fuel shipments of products such as lumber and building products, stone, glass, etc.. In July 2013, housing starts grew by 5.9% m-o-m and 20.9% y-o-y and we believe this trend will continue during the rest of 2013. 
Waste and Equipment Shipments Are Looking Good For CSX In Q3
While CSX’s shipments of military and machinery equipment declined in Q2 2013 due to government budget constraints, these shipments have seen an uptrend in the first few weeks of third quarter till September 7, 2013. In addition, the company continues to see a healthy growth rate in waste shipments, driven by recovery in the construction sector.
Our $25.6 price estimate for CSX’s stock is in line with the current market price.Notes: