What To Watch For In CSX Corporation’s Q2?

by Trefis Team
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CSX Corporation (NASDAQ:CSX) is set to release its Q2 financial performance on July 17, and we expect the company to post modest growth led by the Intermodal segment. However, the company’s coal freight revenues will likely decline amid lower production and the trends in natural gas prices. The company has been focused on bringing down its operating ratio, and this will likely reflect on its adjusted earnings. Overall, we estimate the company to post $3.15 adjusted EPS for the full year 2018. We have created an interactive dashboard analysis ~ What Is The Outlook For CSX Corporation? You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate.

Expect Coal To Decline Amid Expected Lower Production

We expect CSX’s coal freight revenues to decline in the low-mid single digits in 2018. This can be attributed to an expected decline in production as well as exports. U.S. coal production as well as exports declined by over 3.5% in Q1 2018 (q-o-q). This also impacted the CSX’s coal shipments as well as pricing, both of which were down 2% each in Q1 2018. For the full year, coal production is expected to be more or less similar to that of 2017, while the first half of the year it will likely see a 2% decline, according to EIA. This will likely impact the volume and pricing in Q2. However, we don’t expect any significant decline for the full year and forecast the segment revenues to be $2.07 billion, reflecting only a 2% drop, as compares to the prior year revenues. This can be attributed to a modest expected increase in the western region coal production in the U.S., and also the higher oil prices, which will likely boost the fuel surcharge revenue for railroad companies. 

Intermodal To Lead Growth In 2018

Looking at other segments, we expect low-mid single digit growth for Intermodal, and Industrial freight revenue. The ELD (electronic logging device) mandate being fully implemented, has put a constraint on the capacity of the trucking industry. This increases the competitive advantage of railroads over trucks. As shippers move to railroads to ship freight, CSX’s Intermodal, as well as Industrial segments, should benefit from the same. Also, the U.S. crude oil production is on a rise with an expected average of 10.4 million barrels per day (mbd) in 2018, reflecting a 15% increase over the prior year average production. Higher oil production will result in higher shipments of chemicals, and aid industrial freight revenues. 

Our price estimate of $60 is based on an expected EPS of $3.15, and price to earnings multiple of 19x by the end of 2018. Our price target implies a discount of around 8% to the current market price.

 

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