CSX Corporation’s Q2 Earnings Beat Led By Continued Cost Cutting Measures And Better Pricing

by Trefis Team
CSX Corporation
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CSX Corporation (NYSE: CSX) recently posted a better than expected Q2 performance with a mid-single digit revenue growth and 58% jump in EPS, led by continued cost cutting measures. The company’s Intermodal segment saw a 9% jump in revenues driven by both volume and pricing gains. While coal freight pricing was higher, volume declined in low-single digits, as a growth in export coal was offset by the decline in utility coal shipments. The company has revised its full-year 2018 guidance, and it now expects revenues to grow in mid-single digits. As we look forward, we continue to believe that the Intermodal segment will drive the company’s near term growth, along with its continued efforts to bring down its operating ratio. We have created an interactive dashboard ~ A Quick Snapshot of CSX Corporation’s Q2 Performance And Trefis Estimates For 2018. You can adjust the revenue and margin drivers to see the impact on the company’s revenues, earnings, and price estimate.

Expect Intermodal Segment To Drive Near Term Growth

CSX’s Intermodal segment is seeing volume gains, and we expect this trend to continue in the near term. 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 some of the Merchandise shipments, should increase. The company also saw an uptick in automotive shipments, due to a 5% growth in the North America light truck production. Looking at the company’s EBITDA margin, we expect it to improve in the near term, as the company continues to reduce its operating ratio, which stood at 58.6% in Q2 2018, as compared to 63.5% in the prior year quarter. This marks the lowest operating ratio for CSX.

Looking at coal freight, the company reported a 2% decline in volume, as coal utility volume remained sluggish in 2018 while the exports have picked up. We expect a modest increase in revenues, primarily led by better pricing amid higher fuel surcharges. In fact, pricing for most of the segments was higher in Q2, partly driven by higher fuel surcharges. Oil has been trending higher in 2018, due to several geo-political concerns, among other factors. This has translated into higher surcharge revenue for railroad companies, and we expect this trend to continue in the near term, as oil prices are expected to remain higher, when compared to the 2017 average.

Overall, CSX’s Q2 earnings were better than Street estimates, with continued cost cutting measures. We believe that the Intermodal segment will be the key growth driver for CSX in the near term.  We expect the company to post earnings of $3.20 in 2018. We forecast a TTM price to earnings multiple of around 22.5x, to arrive at our price estimate of $72 for CSX Corporation, which is slightly above the current market price.


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