CSX’s Intermodal Business Is The Engine To Growth On Coal Weakness

CSX Corporation (NYSE:CSX) is a leading railroad company in the eastern U.S. Its management recently presented at the JPMorgan aviation, transportation and defense conference on March 6, 2013. CSX reported that its overall volumes were down by 2% annually for the first eight weeks ending on February 22, 2013, as the company continues to face several headwinds. While CSX’s intermodal volumes grew by 4% annually and industrial shipments remained flat, all other sectors showed y-o-y decline in volumes. Its domestic and export coal volumes dropped by 17% and 6% annually for the period respectively.

Facing several challenges, CSX aims to focus on areas such as safety, service, efficiency and inflation, plus pricing to drive its business in 2013. We believe pricing will be a key factor that will drive CSX’s revenues this year as its volumes continue to be impacted by weakness in the coal market. The revenue per unit (RPU) within merchandise and intermodal segments grew by 3% and 2% annually, during the first eight weeks of 2013 respectively. However, the RPU within coal business dropped by 3% for the period.

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Performance Of CSX’s Different Segments During The First Eight Weeks Of 2013

Coal business continues to present headwinds

During the first eight weeks of 2013, CSX’s coal revenue was down by 16%, on account of 14% drop in CSX’s coal volumes coupled with 3% decrease in coal RPU. Both domestic and export coal volumes declined through the period. While domestic coal volumes decreased by 17% annually due to higher coal inventories at utilities, export coal volumes dropped by 6% annually.

We think CSX will continue to face challenges in the domestic coal business in 2013, on account of higher coal inventories at utilities which will limit their demand for new coal purchases.

Merchandise business shows unimpressive revenue growth

CSX’s merchandise business includes industrial, agricultural and construction sectors. During the first eight weeks of 2013, CSX’s merchandise revenues showed 1% annual growth, primarily on account of pricing gains as its merchandise volumes dropped by 2% annually during the period. The RPU within this segment rose by 3% y-o-y during the period.

• CSX’s industrial volumes were flat compared to the prior year. Its industrial volumes include chemicals, metals and auto shipments. While the chemical volumes expanded by 11%, metals and auto business posted a decline. The auto business was down by 2% annually, mainly on account of difficult y-o-y comparisons and loss of a contract. CSX estimates North American light vehicle production to grow by 3% in 2013, which will drive its automotive shipments in the year. ^[1]
• CSX’s agricultural volumes dropped by 3% y-o-y in the period due to decline in grain volumes which was partially offset by growth in phosphates and fertilizer shipments. We expect agricultural market to stay challenging in the near term due to lower grain and ethanol shipments.
• CSX’s construction sector volumes were also down by 2% as higher building products volumes were offset by decreases in transportation equipment and paper volume.

While CSX’s merchandising volumes declined during the first eight weeks of 2013, however, its management expects the merchandise business to still grow in 2013. ^[2]

Intermodal shipments drive growth at CSX

During the first eight weeks of 2013, CSX’s intermodal revenues were up by 6% annually due to 4% rise in its intermodal volumes along with 2% growth in RPU. While CSX’s domestic intermodal volumes grew by 7% on account of continued highway to rail conversions, international intermodal volumes were up by only 1%.

We expect intermodal business to be a growth driver for CSX on account of higher truck to rail conversions and its investments to improve service levels in this area.

Our $22 price estimate for CSX, is around 10% below the current market price.

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1. CSX’s Management Presents at JPMorgan Aviation, Transportation and Defense Conference (Transcript), Seeking Alpha, March 06, 2013 [↩]
2. CSX’s Management Presents at JPMorgan Aviation, Transportation and Defense Conference (Transcript), Seeking Alpha, March 06, 2013 [↩]