Deteriorating Operating Performance Could Hamper CSX’s Market Value

by Trefis Team
CSX Corporation
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The year 2017 started on a great note for CSX Corporation (NASDAQ:CSX), with the appointment of Hunter Harrison as the Chief Executive Officer (CEO) resulting in a 25% jump in the company’s stock price. Since Harrison is a railroad industry veteran, the market expected him to turn around the company and deliver higher returns for them. This coupled with the anticipated rebound in coal shipments due to President Donald Trump’s proposed $1 trillion infrastructure reforms caused the Florida-based company’s stock to surge further, and trade at over $55 per share, almost 50% higher than its price at the beginning of the year.

See Our Complete Analysis For CSX Corporation Here

Source: Google Finance

However, the premium that the market had attached with CSX’s stock appears to be fading gradually. This is primarily due to the deteriorating operational performance of the railroad company over the last few weeks, despite CEO Harrison’s efforts to roll out “Precision Scheduled Railroading” (PSR), wherein he has overhauled rail yards and train schedules. Unlike the straight and uncluttered network of Canadian railroad companies that Harrison had effectively improved using this strategy, CSX’s railroad network is a complex web of tracks that are cluttered throughout several cities, making it difficult for Harrison to efficiently implement his strategy and deliver results.

Consequently, contrary to Harrison’s expectations, the company’s key performance indicators – train velocity and terminal dwell – have fared poorly over the last couple of months. For instance, CSX’s train velocity or speed, which stood at 15.6 miles per hour (mph) at the beginning of July, fell to 13.3 mph in the end of August. Similarly, the company’s terminal dwelling, which indicates the total time spent by a train on a terminal, rose from 11.8 hours to 13.2 hours due to two disruptive derailments during the month of July, before coming back to 11.9 hours by the end of August.

Source: CSX’s STB Update, 28th August 2017

The degradation of the company’s operational performance has also led to a rise in customer complaints. CSX’s customer inquiries have gone up sharply from 354 at the beginning of July to around 500 at the end of August. The increased customer complaints forced the Surface Transportation Board (STB) to take charge of the situation and demand an update about the recent service issues and the corrective measures taken by CSX. However, rather than focusing on improving its performance and providing more clarity on the issues, CSX has changed its methodology to estimate various key indicators previously reported on the American Association of Railroads (AAR) website. This has not only hampered direct peer comparison by investors but also reflects poorly on the part of the company.

Change In Methodology To Calculate Operational Metrics By CSX

In addition, the sudden slip in CSX’s operational performance has enabled Norfolk Southern Corp. (NYSE:NSC) to take advantage of the situation and attract CSX’s customers by providing better services. This implies that CSX has to not only cope with the rising customer dissatisfaction but will also have to protect its market share from its competitors.

Although CSX is actively working to get its operational metrics back on track, its weak performance in the third quarter has forced it to revise its full year guidance. With the appointment of Harrison, the company had expected its operating ratio (operating expenses as a % of revenue) to come down from the current 70% to around 60%. However, given the transition issues in the third quarter, the company’s aim to achieve its targeted operating ratio is likely to be delayed. According to the company’s latest presentation, its ratio is expected to be at the high end of the mid-60% by the end of this year.

Thus, we believe that CSX’s operational performance has seen a sharp decline, which is not only leading to a loss in revenue due to dissatisfied customers, but also loss of market share to its competitors. If the company does not take corrective measures to bounce back soon enough, its stock is likely to lose the premium that it received because of the appointment of its new CEO and improving conditions in the coal markets.

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