Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message| ()  

Quick Take

  • CSX’s net earnings rose by 2% annually in Q1 2013 to $459 million.
  • Its revenue stood at around $3 billion, which was in line with the prior year.
  • Improvement in operating ratio, which decreased by 70 basis points annually, contributed to the earnings growth
  • CSX’s coal and agricultural revenues fell by 13% and 12% annually respectively, during Q1 2013. However, this was offset by higher revenues in intermodal and merchandise businesses.
  • The company also announced 7% increase in its quarterly dividend along with a new $1 billion share buyback program.

CSX Corporation (NYSE:CSX), a leading railroad company in the Eastern U.S., posted net earnings of $459 million in Q1 2013, which represented an annual increase of 2%. The earnings growth was achieved even while the company’s revenue was flat, compared to the prior year. Its operating ratio decreased to 70.4% in the quarter as compared to 71.1% in Q1 2012.

In addition, CSX also reported a 7% rise in its quarterly dividend (on the company’s common stock) along with a new $1 billion share buyback program, which is expected to be executed over the next two years.

We are encouraged by the company’s results as the earnings growth was achieved despite challenging conditions in several end-markets. We think that the declines in coal and agricultural volumes could decelerate in the future. Natural gas prices have started to move northwards of $3.50, and continuation of this trend could augur well for the coal market. Moreover, improved service and safety measures could result in higher profitability in the future. CSX targets to lower its operating ratio to the high 60s by 2015, and mid-60s over the long term.

Coal and Agricultural Markets Presented Challenges In Q1 2013

The weakness in the coal and agricultural markets contributed to the decline in overall volumes, which fell by 2% annually during the quarter. In line with our expectations on CSX’s coal business, its coal revenues were down by 13% in Q1 2013, due to 10% drop in volumes coupled with 3% decrease in revenue per unit. Its domestic coal volumes fell by 15%, on account of competition from natural gas and higher coal inventory levels at utilities. Export coal volumes also witnessed a decline of 2% on account of reduced shipments of thermal coal to Europe, where weakness in the overall economy resulted in reduced demand for electricity generation.

During the rest of 2013, we expect the pace of decline in the coal market to decelerate, on account of easier y-o-y comparisons and rise in natural gas prices, which reached $4 (per million BTU) at the end of March 2013. [Natural Gas Spot and Futures Prices (NYMEX), U.S Energy Information Administration, April 3, 2013].

CSX’s agricultural products revenues fell by 12% annually on account of decreased shipments of feed grain and ethanol as a result of carryover from the last year’s drought. We think that this market could have a better outlook in the second half of 2013, with recovery in crop output.

Intermodal and Chemicals Businesses Showed Growth

CSX’s chemicals and intermodal revenues saw an annual rise of 13% and 4% respectively, in Q1 2013. The growth in the chemicals business was driven by higher shipments of crude oil, liquefied petroleum gas (LPG) and frac sand. We think that the outlook for this segment is positive throughout 2013, due to the changing energy landscape in the U.S. Growth in crude oil production along with inadequate pipeline infrastructure will support higher shipments of petroleum products.

The rise in CSX’s intermodal revenues was underscored by higher truck-to-rail conversions and increased service offerings. We expect this segment to post growth throughout 2013, on account of the same growth drivers.

Mixed Trend Was Seen In Other Merchandise Businesses

While lower volumes were seen in CSX’s shipments of metals, waste and equipment, and food and consumer products, the volumes for phosphates and fertilizers saw an annual rise of 5%. Automotive volumes, which had grown by double digits in the prior year, saw flat growth in Q1 2013, mainly on account of tougher y-o-y comparisons.

CSX expects growth in overall merchandise business to outpace overall economy growth in 2013 [CSX’s CEO Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, January 23, 2013].

Improvements In Safety And Service Measures

With improvements in most of the safety and service measures, CSX showed higher service levels during the quarter. The train velocity (in miles per hour) improved from 22.3 to 23.4. On-time train originations and on-time destination arrivals improved by 2% and 10% respectively, in Q1 2013. We are encouraged by these trends as they are expected to contribute to efficiency gains in the future.

We are in the process of estimating the price for CSX’s stock.

Disclosure: No positions

Source: CSX's Earnings Grow Despite Significantly Weaker Coal Revenue