Domestic Coal, Merchandise And Intermodal Shipments Will Drive CSX’s Earnings

CSX Corporation (NYSE: CSX), a leading railroad in the eastern U.S., will be reporting its second quarter earnings on July 16. We expect to see growth in its second quarter revenue driven by an increase in carloads of almost all commodities. Coal shipments will be of particular interest since the domestic coal market seems to be reviving. However, the export coal business still presents headwinds. CSX’s operating ratio, which are its operating expenses expressed as a percentage of revenues, may suffer from the spillover of costs incurred in the first quarter in order to deal with the harsh winter weather.

Revisiting first quarter 2014

In the first quarter, CSX’s revenue grew 2% to just cross $3 billion due to growth in its intermodal and merchandise shipments. ^[1] Net earnings declined 14% year-over-year to reach $398 million owing to the higher operating costs driven by the harsh winter weather. CSX’s operating ratio increased 5.2% to reach 75.5%.

Given the poor earnings performance in the first quarter, CSX expects that growth in earnings per share for the full year will be somewhat moderate compared to the company’s earlier guidance of 10-15%.

See our complete analysis of CSX here

Domestic coal likely to offset declining export coal shipments

After declining for the past two years, CSX’s domestic coal business turned around in the first quarter of 2014 posting 8% increase in volume. We expect that CSX’s domestic coal shipments will continue to grow in the second quarter as well driven by two favorable conditions. Firstly, the rising price of natural gas which remained above $4.50 per million btu during the second quarter, making coal from the Powder River Basin, Illinois Basin and North Appalachian region profitable. ^[2] CSX’s network is well connected to these coal sources and will have definitely benefited from this trend. Secondly, the depleting coal inventory at north and south utilities will have raised the demand for coal. In May 2014, the amount of coal inventory available at north and south utilities would have been sufficient for 43 and 55 days respectively. ^[3] These numbers are well below the historical average and would have encouraged utilities to replenish their inventory.

On the other hand, U.S. export coal is still suffering due to depressed global prices caused by the oversupply of coal in global markets driven by a demand supply mismatch. Because of the low global price, exporting coal becomes unprofitable for U.S. coal miners, leading to fewer carloads of coal shipments for CSX. However, the growth in domestic coal shipments has more than offset the decline in export coal shipments. As per CSX’s carloading report for quarter-to-date ending June 28 2014, coal carloads were up by 7.5%. ^[4] This means that we would see growth in coal shipments, but revenue per carload may be low due to the impact of low export coal volumes.

Merchandise and Intermodal Shipments will help bolster revenues

After a moderate growth in the previous quarter partially tempered by the harsh winter weather conditions, we believe CSX’s Merchandise shipments will post strong growth in the second quarter. As per CSX’s carloading report for quarter-to-date ending June 28, merchandise shipments such as grain, chemicals, petroleum products, housing and construction related material, and automotives have increased. ^[4] This is because of continued growth in the end markets for these commodities. Additionally, better operating conditions due to favorable weather and the spillover of shipments from first quarter to the second quarter will also have helped boost Merchandise shipments.

Intermodal volumes have grown high single digits during the quarter-to-date ending June 28, driven by growth in demand as shippers continue to shift to rail given its advantage over trucks. ^[4] Intermodal business is a long term growth driver for CSX and the company will continue to see solid growth in this segment in the coming years.

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1. CSX First Quarter 2014 Financial Report , April 15 2014, www.csx.com [↩]
2. Henry Hub Natural Gas Spot Price, www.eia.gov [↩]
3. Fredrik Eliasson Addresses Deutsche Bank Global Industrials and Basic Materials Conference, www.csx.com [↩]
4. CSX Weekly Carload Report 2014 Week 26, www.csx.com [↩] [↩] [↩]