CSX’s 3Q’17 Earnings To Suffer Because Of Its Weak Operational Performance

by Trefis Team
CSX Corporation
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CSX Corporation (NASDAQ:CSX), the Florida-based railroad company, is set to release its financial performance for the September quarter on 17th October 2017 ((CSX Corporation Announces Dates For Third-Quarter Earnings Release and Earnings Call, CSX News Release)). While the market expects CSX to post an annual improvement in its earnings driven by the rebound in coal shipments, the company is likely to witness a drop in its results on a sequential basis due to its deteriorating operating performance during the quarter(Read: Deteriorating Operating Performance Could Hamper CSX’s Market Value).

See Our Complete Analysis For CSX Corporation Here

Key Trends Witnessed During 3Q’17

According to CSX’s weekly shipment data, its coal and coke shipments continued to grow in the third quarter, driven by the rebound in demand for coal due to the rising natural gas prices and favorable government policies. Further, the company’s intermodal shipment volumes, which represents the shipments of containerized cargo both for domestic and international markets, also increased about 4% during the quarter. However, this growth was more than offset by the decline in the agricultural, industrial, and construction shipments, which pulled down the company’s overall shipments by 0.5% for the third quarter.

In addition to the lower shipments, the average Brent crude oil prices for the quarter dropped around 8.5% (calculated based on two-month lagged prices) compared to the previous quarter. As a result, the company is likely to experience a decline in its fuel surcharge revenue for the quarter. With lower shipments and reduced fuel surcharge revenue, we expect CSX’s 3Q’17 revenues to remain weak compared to the previous quarter.

Apart from this, CSX’s operational performance has suffered significantly in the last couple of months, unlike the previous quarter, where the new CEO’s ‘Precision Scheduled Railroading’ initiative resulted in notable productivity improvements. For instance, the company’s train velocity, or speed, which stood at 15.6 miles per hour (mph) at the beginning of the quarter, fell to 13.3 mph at the end of August. While the company is making efforts to improve its operational indicators, we expect its third quarter earnings to be pulled down by its poor performance during the quarter. Besides, CSX’s customer inquiries have gone up sharply from 354 at the beginning of July to around 500 at the end of August. Thus, in order to pacify the upset clients and local authorities, CSX has changed its methodology to estimate various key indicators previously reported on the American Association of Railroads (AAR) website. While this will enable the company to window-dress some of its operational metrics, it will hamper direct peer comparison for the investors, which reflects poorly on the part of the company.

Source: Google Finance

Thus, we believe that lower shipments and fuel surcharge revenue is expected to weigh on CSX’s top line for the third quarter. Further, the company’s weak operational performance during the quarter is likely to drag down its third quarter earnings. If the company does not take corrective measures to enhance its performance soon enough, it is likely to lose the premium that it had received because of the appointment of its new CEO and also might end up losing a part of its market share to its competitors.

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