CSX Earnings: Profit Rises On Fuel Price Decline

CSX Corporation (NYSE: CSX) reported its first quarter results on April 14. The railroad’s revenue was relatively stagnant at $3.03 billion due to sluggish volumes and weak revenue per unit. ^[1] However, net earnings increased 11% driven by solid improvements in its operating ratio (operating expenses expressed as a percentage of revenue) as a result of low fuel prices. Earnings per share increased 13%, to reach $0.45, slightly higher than consensus estimates of $0.44.

CSX’s stock shot up 4% during after hours trading as investors reacted positively to the marginal earnings per share beat and the likelihood of Norfolk Southern’s weak earnings expectations not being an industry-wide phenomenon. The market was skeptical about the performance of the railroad industry after Norfolk Southern announced that it expected a decline in its earnings. ^[2] However, CSX’s positive results indicated that the weakness may be confined to Norfolk Southern.

Investors also welcomed the company’s announced dividend increase and new share repurchase plan. CSX announced a 13% increase in its quarterly dividend, payable in June. Following the completion of its previous share repurchase plan of $1 billion, the railroad has announced a new $2 billion share buyback program, which is expected to be completed over the next 2 years.

See our complete analysis of CSX here

Fuel Offsets Pricing But Lowers Expenses

Despite a 1.6% increase in its first quarter pricing, CSX reported flat revenue per unit due to an $89 million decline in fuel surcharge. ^[1] CSX’s fuel surcharge revenues have been suffering due to the sharp decline in fuel prices. However, the declining fuel prices have led to a net positive benefit for CSX. This is because fuel surcharge is based on two month lagged values of highway diesel prices, while fuel expenses are based on spot prices. Since fuel prices have declined continuously, spot prices are lower than prices two months back, leading to lower fuel expenses than fuel surcharge revenues.

The average price of the U.S. on-highway diesel fuel declined 26% year-on-year in the first quarter. ^[3] This led to a $176 million decline in CSX’s fuel expense. The lower fuel bill helped reduce CSX’s operating expense, which declined $89 million, leading to a 3.3% improvement in the railroad’s operating ratio and 11% increase in net earnings. It is pertinent to note that the previous year’s first quarter suffered heavily due to the extremely bad weather. Therefore, this quarter’s operating ratio also benefited from the weak comparison.

CSX expects to reach a high 60s operating ratio by 2015. To this end, CSX will be purchasing locomotive and hiring employees. This should help improve the company’s poor service metrics and position it to efficiently deal with the growing volumes, thereby improving its operating ratio.

Volume Sluggish On Coal Declines

CSX’s overall volumes grew 1% as gains in merchandise and intermodal shipments were offset by coal declines. ^[1] Export coal tonnage declined 7% as a result of coal prices having slumped due to high output in Australia and low demand from China. The strong U.S. dollar has also presented headwinds to U.S. coal suppliers. The weak export coal volumes also drove down revenue per unit by 2%. Low natural gas prices encouraged utilities to move away from coal, leading to a 1% decline in CSX’s coal tonnage to utilities.

Weakness in U.S. railroads coal volumes is likely to persist in the short term. The price of metallurgical coal may decline to a six year low in the second quarter of the year as Australian coal producers have agreed to sell met coal at around $109.50 per metric ton to Japanese steel mills in the second quarter, compared to $117 in the first quarter. ^[4] This will probably keep U.S. metallurgical coal producers at bay. Thermal coal traded at around $54 in the beginning of April, significantly lower than the cost of production at many U.S. mines, which will likely lead to decline in future thermal coal shipments for railroads.

CSX’ intermodal volumes grew a sluggish 1% as domestic gains were offset by disruptions in international volumes. West coast labor disputes led to fewer intermodal shipments moving inland, which resulted in a 7% decline in CSX’s international intermodal shipments. ^[1] However, strong growth in domestic shipments, as a result of tightening trucking capacity and growth at existing customers, helped overall intermodal volumes. Going forward, intermodal shipments should improve since labor contract negotiations between the ILWU and PMA have ended.

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1. CSX’s Q1 2015 Financial Report, www.csx.com [↩] [↩] [↩] [↩]
2. Norfolk Southern expects to report earnings of $1.00 per share, 15% below 2014, April 13, www.nscorp.com [↩]
3. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), www.eia.gov [↩]
4. Met Coal Tumbles to New Six-Year Low Amid Slumping Demand, March 17, 2015, www.bloomberg.com [↩]