CSX Earnings Preview: Revenue Growth Will Be Heavily Reliant On Volumes

CSX Corporation (NYSE: CSX) will be reporting its fourth quarter and annual earnings on January 13 after market close. Per its carloading report, it seems that CSX’s fourth quarter results will be driven by growth in shipments of petroleum products, domestic coal and intermodal. However, stagnant revenue per unit for these commodities will likely not contribute much towards revenue growth.

We will be keeping an eye on CSX’s operating ratio (operating expenses are expressed as a percentage of revenues), which increased considerably in the first quarter, followed by a marginal increase in the second quarter. Though it did improve slightly in the third quarter, the operating ratio for the nine months ended September 26 remained 100 basis points higher than the previous year. ^[1] A high operating ratio is not favorable for the railroad’s bottom line.

CSX’s third quarter revenue grew 7.9%, to reach $3.2 billion, on strong volume growth across all commodities. However, revenue per unit remained sluggish due to export coal headwinds and an unfavorable domestic coal mix. CSX’s net profits improved 11.8% on account of an improvement in its operating ratio. An increase in net profits and lower share count helped boost earnings per share for the quarter by 13.3%, to reach $0.51.

CSX’s management announced modest full year earnings per share growth expectations compared to an earlier guidance of 10-15%, due to the poor performance in the first quarter. We estimate annual revenues of $12.6 billion and EPS of $1.87, roughly in line with consensus estimates.

See our complete analysis of CSX here

Intermodal Will Likely Grow On Tightening Trucking Capacity

Intermodal volumes have been an important driving factor for CSX in the past few years, cushioning the decline in coal carloads in 2012 and 2013. In the first half of 2014, intermodal volumes grew as shippers imported their holiday season merchandise earlier than usual due to concerns regarding the possible disruptions that could have been caused by the ongoing labor contract negotiations between ILWU and PMA. However, base level growth in intermodal volumes has primarily come from the tightening trucking capacity in the U.S.

The Hours-of-Service safety regulation for commercial vehicle drivers added pressure on the trucking industry, which was already suffering from a dearth of truck drivers and declining fleet sizes. Because of this limited trucking capacity, shippers began to move their merchandise by rail rather than trucks. Comparatively lower costs also made railroads a more attractive option. CSX’s intermodal service benefited from the highway-to-rail conversion of shipments and has been growing at a strong pace in the past few years and through 2014.

According to its carloading report, CSX’s fourth quarter intermodal carloads are up 5.1%, which should help drive revenue growth. ^[2] However, intermodal revenue per unit may remain stagnant, as was seen through the first nine months of 2014, because of an unfavorable mix of domestic intermodal services.

Declining Revenue Per Unit May Offset Coal Volume Growth

CSX’s coal carloads in the fourth quarter have grown 11.1% year-on-year. ^[2] We believe that this growth has primarily come from improvements in domestic demand at utilities and competitive gains earlier in the year. Utilities have been replenishing their coal inventory over the past few quarters as a result of the rise in natural gas price. Despite strong growth in volume, it is likely that coal revenues may decline in the fourth quarter.

Of late, growth in coal volume has been more than offset by the steep decline in revenue per unit. CSX’s coal revenue per unit declined 8% year-on-year in the first nine months of 2014 due to weak coal exports. Low prices for thermal and metallurgical coal in global markets have put considerable pressure on U.S. coal exports, which are estimated to have declined 18.3% in 2014. ^[3] Lower coal exports have led to an unfavorable mix resulting in a decline in CSX’s coal revenue per unit.

Crude Oil Production To Drive Chemicals Shipments

According to its carloading report, CSX’s fourth quarter petroleum products carloads are up 44.7%. ^[2] This is due to the increase in crude oil production in the U.S. The U.S Energy Information Administration estimates crude oil production to have increased to 8.6 million barrels per day in 2014, compared to 7.4 million barrels per day in 2013. ^[4] CSX’s chemicals shipments, which include petroleum products, should benefit from the growth in crude oil production.

CSX’s chemicals revenue will be completely reliant on volume-based growth in the fourth quarter. This is because revenue per unit has been relatively stagnant through the first nine months of 2014, and there have been no indications of an increase in the fourth quarter.

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1. CSX’s Q3 2014 Financial Report, www.csx.com [↩]
2. CSX’s 2014 Week 53 Carloadings Report, www.csx.com [↩] [↩] [↩]
3. EIA Short-Term Energy Outlook – Coal, December 9, 2014, www.eia.gov [↩]
4. EIA Short Term Energy Outlook – Oil, December 9, 2014, www.eia.gov [↩]