CSX’s Earnings Grow On Volume, Favorable Operating Ratio

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CSX Corporation (NYSE: CSX) reported its fourth quarter and full year 2014 results on January 13 after market close. The railroad’s fourth quarter revenue grew 5% driven by broad-based volume growth but unaided by revenue per unit. [1] Annual revenue also grew 5% to slightly below $12.7 billion, higher than market expectations. CSX’s net income in the fourth quarter increased 15% driven by solid improvements in its operating ratio (operating expenses expressed as a percentage of revenue). Annual earnings grew a comparatively sluggish 3%, primarily suffering due to the weak performance in the first quarter. Earnings per share increased 17% and 5% in the fourth quarter and annual results, respectively, benefiting from a lower share count.

CSX expects to see continued growth across all its segments in 2015, with double digit earnings per share growth and margin improvements. Management reiterated its expectations of a mid-60s operating ratio in the long term.

See our complete analysis of CSX here

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Volume Growth Drives Revenue

CSX’s overall volumes grew 5%, with particular strength in coal and chemicals shipments. [1] In line with our expectations, revenue per unit declined as a result of the unfavorable product mix in coal shipments and lower fuel surcharge.

CSX’s coal tonnage increased 12% in the fourth quarter driven by strong domestic demand. Coal tonnage to utilities increased 22% as a result of inventory replenishment before the winter season and the competitive gain earlier in the year. Growth in metallurgical coal tonnage was unable to offset the strong decline in thermal coal, which continues to suffer due to weak global markets. As a result, export coal tonnage declined 7%, severely impacting coal revenue per unit, which fell 4% in the fourth quarter.

The increase in crude oil production in the U.S. helped drive CSX’s chemicals shipments up by 15%. Demand for crude oil shipments has also gone up due to its falling price, which has encouraged an increase in shipments to east coast refineries. However, the falling diesel price negatively impacted fuel surcharge revenue, which led to a 2% decline in CSX’s chemicals revenue per unit.

Meanwhile, CSX’s intermodal volumes increased 5% in the fourth quarter driven by strong domestic demand. However, international volumes were sluggish, with 1% growth as a result of market loss. Tightening trucking capacity and strong growth at customers helped domestic intermodal volumes increase 9%.

Operating Ratio Improves On Healthy Revenue, Low Fuel Expenses

CSX’s fourth quarter operating ratio improved 140 basis points, to reach 71.8%, compared to 73.2% in the previous year’s fourth quarter. [1] Higher growth in revenue compared to operating expenses helped drive this solid improvement. Overall operating expenses increased 3%, though fuel and materials, supplies and other expenses moved in a favorable direction. Fuel expenses declined $47 million due to declining fuel prices. However, the decline in fuel prices took a toll on fuel surcharge revenue, which declined 3% in the fourth quarter.

CSX’s materials, supplies and other expenses declined 1% as a result of the railroad now managing its locomotive maintenance in-house. These expenses are now part of labor and fringe costs. Labor and fringe expenses grew 13% primarily due to volume increases, inflation and a management workforce reduction program, which resulted in an initial charge of $39 million for the quarter.

The improvement in operating ratio in the fourth quarter did help lower the annual operating ratio but it was still 40 basis points higher than the previous year’s operating ratio. In 2015, we expect to see the railroad’s operating ratio reach the high-60s, given the increase in pricing of its renewed contracts and the size of its locomotive fleet. (Click here to read our article)

Outlook for 2015

We believe that CSX should see strong growth in 2015. The growth in volumes will likely be driven by strong agricultural, crude oil, construction material and intermodal shipments. Additionally, we expect to see some growth in CSX’s revenue per unit. CSX has been renewing its contracts for 2015 with a particular focus on repricing. According to CSX, there has been a “significant improvement” in pricing, which will be “much more robust” than the last three or four years. [2] In 2013, CSX’s core pricing grew 1.3%, driving a 2.3% increase in revenue.

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Notes:
  1. CSX’s Q4 2014 Financial Report, www.csx.com [] [] []
  2. CSX’s (CSX) CEO Clarence Gooden on Q3 2014 Results – Earnings Call Transcript, October 15, 2014, www.seekingalpha.com []