CSX (CSX) has been chugging along nicely this year. The stock has appreciated 33% and market conditions indicate that the company's 21,000 route miles of rail network might lead to further gains. Its recently declared second-quarter results were solid as the company beat estimates and investors can expect more such beats in the future. Let's see how CSX performed in the quarter in brief and then analyze its prospects.
In the previous quarter, CSX posted revenue of $3.07 billion, slightly higher than the year-ago quarter's revenue of $3.01 billion. It beat consensus estimates of $3.02 billion, fueled by higher volumes and pricing combined with improvements in operating efficiency and services. Growth in intermodal transport revenue and merchandising gains enabled CSX offset the declines from coal.
Operating income increased 2% and this helped the company earn $0.57 per share, exceeding the consensus estimate of $0.47 per share. This was also better than the year-ago quarter's EPS of $0.49.
Industrial and coal are CSX's two major revenue-generating segments, bringing in 31% and 25% of total revenue, respectively. Cheaper natural gas has resulted in a decline in the Coal business as former users of coal switched to natural gas because of lower costs. But coal's performance might improve in the future as natural gas is seen losing market share to coal as it becomes cheaper. A cheaper coal can again lead end users to switch fuels and a recent report suggests that natural gas is losing market share to coal. This indicates better times for CSX as coal transportation might gain strength on the back of lower coal prices.
As far as operating efficiency is concerned, CSX aims to bring down its operating ratio to the high 60s range by 2015 and subsequently move further down to the mid 60s in the long term. The operating ratio is an important measure in the industry that shows expenses incurred to revenue earned for railroad companies. CSX is looking to do this in order to be able to navigate through a sluggish economy and the volatile coal market scenario.
CSX has a number of profit generating factors working in its favor. These include favorable rail industry pricing, enhancement of the network and terminal capacity, and recovery in the construction sector. In addition, focus is also on improving the operational efficiency and offer better services at affordable costs to customers and these moves will likely drive profitability.
Acquisitions and mergers are integral to CSX's expansion/diversification plans. Last month, CSX announced the acquisition of the Eastern Associated Terminal in Tampa, Fla. from the Ingram Barge Company. The capacity of combined terminals will result in fast & scalable expansion along with capacity for 1 million additional export tons.
Other players -- Union Pacific and Kansas City Southern
Union Pacific (UNP) connects 23 states in the western part of country, thus facilitating timely movement of goods in the critical supply chain. It posted second-quarter results recently, which revealed adjusted earnings of $2.37 per share, beating consensus estimates by $0.02 and year-ago earnings of $2.10. This was possible due to a higher pricing structure and also improvement in the operating ratio. Revenue increased 5% to $5.47 billion but missed consensus estimates of $5.49 billion.
The company is focusing on key areas like pricing, new business avenues and improving network efficiency through enhanced safety, reliability and productivity. Ford awarded Union Pacific with its Go Further Award recently. Moreover, Union Pacific has also announced that it will again boost its dividend payout by more than 14%. The company is witnessing an improvement in revenue and profits and is poised to grow as freight rail in the U.S. is projected to grow further.
In order to tap the opportunity presented by Valero's crude-by-rail project, Union Pacific is already strengthening its infrastructure, which began in June this year. This is a minor part of a huge $3.6 billion initiative covering 23 states with the purpose of enhancing network efficiency, adding new business areas and improving safety, reliability and productivity.
Kansas City Southern:
Kansas City Southern (KSU) reported second-quarter adjusted earnings of $0.96 per share recently, beating consensus estimates of $0.92. Adjusted earnings saw an increase from $0.88 from the year-ago quarter, driven by increased pricing and improvement in volumes. Total revenue saw a 6% climb from year-ago quarter to $579.3 million. This was helped primarily by 3% increase in carloads and significant improvements in the company's energy segment.
Kansas City remains well positioned to reap benefits from the ongoing strong pricing trend and also the recovery post recession. 25% of its revenue comes from the industrial sector. The housing recovery should also help Kansas City's revenue as forest products make up 46% of the industrial and consumer products division.
Kansas City is expected to witness growth of 48% in sales till 2016. This is superior than every peer for whom estimates are available, according to data compiled by Bloomberg. This terrific growth is being driven by the company's operations in Mexico. Also, Kansas City should benefit from growth in crude-by-rail to Texas and that's why the company is building a new crude terminal in Port Arthur.
CSX has been moving ahead at a good pace as it enjoys higher pricing. However, what sets it apart from the other two companies discussed in this article is that it has a higher dividend yield at 2.4%, while Union Pacific's yield is 2% and Kansas City's yield of 0.80% is very small. Hence, investors who want decent dividend income along with price appreciation should take a look at CSX.