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CSX Corporation (CSX) is a leading railroad company in the eastern U.S. Its management recently presented at the Citi U.S. & European Industrials conference on September 17. In this article, we update our readers on the volumes being seen in the third quarter. Overall, we think the volume trends look better in the third quarter, as compared to what was seen during the first half of the year.

Strong growth in construction, intermodal and industrial sector volumes will lift the overall volumes in Q3. However, the coal market continues to be a challenging area for CSX due to pressure on both domestic and export coal volumes. While, the agricultural volumes look weak in the third quarter, we expect recovery in this market in the fourth quarter.

CSX expects the full year earnings per share in 2013 to be broadly in line with the previous year. Apart from the coal market, we believe negative y-o-y impact from certain real estate transactions and liquidated damages will impact earnings growth in the second half.

Segment Annual Volume Growth (Q3YTD till September 6, 2013) Annual Volume Growth (H1 2013) % Contribution in 2012 Revenue
Construction Sector 9% 1% 12%
Intermodal 5% 2% 14%
Industrial Sector 6% 4% 30%
Agricultural Sector (2%) (2%) 15%
Domestic Coal (6%) (5%) 27%
Export Coal (12%) (14%)

Source: [1]

Housing recovery is driving shipments in the construction sector

CSX’s construction sector volumes have grown by 9% in the first 10 weeks of Q3 2013, as compared to slower growth in the first half. The ongoing housing recovery and increased construction activity in the U.S. is driving shipments of products such as lumber and building products, stone, glass, etc. The housing starts rose by 20.9% and 19% annually in July and August respectively, and they are responsible for approximately 6% of CSX's overall volumes. [2] We expect a positive trend in this market to continue in the future as well.

Domestic truck-to-rail conversions is driving the intermodal segment

The intermodal volumes have grown at 5% during the first 10 weeks of Q3, owing to continued domestic truck to rail conversions and increased business with international shipping partners. The company estimates potential domestic truck to rail conversion opportunity in the eastern region at 9 million truckloads and is making investments to increase its capacity in the area. Moreover, the company aims to raise the share of intermodal traffic moving in double-stack lanes from 90% currently to mid-90% by 2015. Hence, we believe this segment is positioned as a long-term growth driver for the company.

Petroleum products shipments continue to boost CSX’s industrial sector shipments

CSX’s industrial sector (which contains chemicals, automotive and metals) volumes rose by 6%, which was higher as compared to the growth achieved in the first half. We believe the robust growth in this segment is being buttressed by strong demand for petroleum products shipments. According to the CSX Weekly Carloads and Intermodal Traffic Report, petroleum products carloads rose by 44.1% during the third quarter until September 7, 2013. Metals and products carloads rose by 4.7% during the same period and this is contributing to the high growth in the segment. [3]

While we expect the demand in the automotive segment to stay strong during the second half of 2013, we believe the growth rate will be impacted by difficult y-o-y comparisons. CSX’s automotive carloads saw flat growth during the first 10 weeks of Q3 till September 7, 2013. [3]

Headwinds in the agricultural market could subside in the fourth quarter

Agricultural shipments have seen some decline during the first 10 weeks of Q3 2013 due to continued impact from last year’s drought. However, we believe this trend could reverse in the fourth quarter with higher anticipated crop yield. According to United States Department of Agriculture, U.S. corn production is expected to rise by 28% in 2013 and this should stimulate shipments in the later part of the year. (Citi 2013 US and European Industrials Conference, Union Pacific, September 18, 2013)

Coal market headwinds to continue during the second half

Comprising for around 27% of CSX’s revenue in 2012, the coal market continues to be challenging for the company. Its domestic and export coal shipments fell by 6% and 12% during the first 10 weeks of Q3 2013. CSX estimates export coal volumes to decline by 16% in 2013, owing to continued weakness in the international coal market.

CSX forecasts domestic coal volumes to decline by 5-10% annually in 2013, due to intense competition from natural gas and high coal inventory levels at Southern utilities. Hence, we expect the coal market to be a painful area for the company in the near future.

Our $25.60 price estimate for CSX’s stock is around 5% below the current market price.

Notes:

  1. Citi U.S. & European Industrials Conference, CSX, September 17, 2013
  2. Housing Starts, Mortgage News Daily
  3. Association of American Railroads (AAR) Reports, CSX

Disclosure: No positions

Source: How CSX's Different Segments Are Performing In The Third Quarter