What To Expect From CSX Corporation’s Q4 Results?

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CSX Corporation (NYSE: CSX)  is set to release its Q4 financial performance on January 16, and we expect the company to post steady growth in all segments. The company saw a record low operating ratio of 58.7% in the previous quarter, as it effectively managed its costs. We expect this trend to continue in Q4 as well, and aid the bottom line. Overall, we estimate the company to post $3.60 adjusted EPS for the full year 2018. We have created an interactive dashboard analysis ~ What Is The Outlook For CSX Corporation ~ on the company’s expected performance for the full year 2018 and 2019. You can adjust the revenue and margin drivers to see the impact on the company’s earnings, and price estimate. Below we discuss the key segments which could see growth in Q4.

Expect Coal Freight To See Mid-Single Digit Growth For The Full Year

We expect CSX’s coal freight revenues to grow in mid-single digits led by both volume and price gains for the full year 2018. The company posted a 14% jump in coal revenues in the previous quarter, as the weakness in utility coal was offset by strength in the export business, and we expect this trend to continue in the near term. The U.S. coal export segment is seeing growth due to a rise in global benchmark coal prices, which were up roughly 15% in 2018. The decline in utility coal demand can largely be attributed to the trends in natural gas prices. The benchmark Henry Hub natural gas price is currently trading around $3 levels, similar to what it was in the prior year. The prices did move to north of $4.50 last month over supply concerns, but have corrected since then. With gas prices being more attractive, the dependency on coal as an energy source continues to come down. In fact, as per the latest EIA estimates of 650 million short tons (mst) coal consumption in 2019 will mark the year with the lowest coal consumption over the last 40 years. On the other hand, there has been a sharp growth in the coal exports, which were up over 25% (y-o-y) to 87 mst for the nine month period ending September 2018. For the full year, exports are estimated to grow in mid-teens, according to EIA. As such, the utility coal shipments for CSX will likely remain lower, while exports should continue to trend higher in the near term.

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Intermodal Will Likely See High Single Digit Revenue Growth For The Full Year

CSX’s Intermodal segment has seen volume gains of late, and we expect this trend to continue in the near term. This can be attributed to continued driver shortage after the full implementation of the ELD mandate in late 2017, which has put capacity constraints in the trucking industry, and manufacturers are looking for alternative means of transport. The segment revenues were up in high single digits for the nine month period ending September 2018, and we forecast a similar growth in Q4 as well.

Merchandise Freight Revenues Could Grow In Mid-Single Digits
Looking at Merchandise freight, we forecast mid-single digit growth in segment revenues, primarily led by automotive, metals, and forest products. In fact, the segment revenues were up 12% for the nine month period ending September 2018, with growth across all sub-segments but fertilizers, which saw low single digit revenue decline amid closure of a facility in late 2017. This trend could continue in Q4 as well. However, pricing gains may be moderate going forward, given that crude oil prices have fallen sharply over the last couple of months. Note that fuel surcharge is a component of average revenue per carload for railroad companies, and the same is impacted by any movement in oil prices. We forecast the company’s EBITDA margins to expand by 300 bps for the full year 2018, as the company remains focused on reducing its operating ratio. We estimate the EBITDA to be a little under $7 per share in 2018. We currently have a $80 price target for CSX Corporation, which we will update post the Q4 earnings announcement.

 

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