CSX Corporation’s (CSX) fourth quarter earnings may be positively impacted by its intermodal and merchandise businesses as it tries to offload declines from coal volumes by focusing on these segments. CSX is set to release fourth quarter and annual 2013 earnings on January 15.
Coal shipments have been a problem for CSX and its competitor Norfolk Southern (NSC) throughout the year due to a shift towards cheaper natural gas and overhanging coal inventories. For CSX, its intermodal and chemical shipments have been important factors contributing to its growth in revenue and volumes for the nine months of 2013. We expect that these factors will continue to drive growth for CSX in the fourth quarter.
Revisiting Third Quarter 2013
In the third quarter 2013, CSX posted revenue growth of 4% owing to strong growth in its merchandise and intermodal business. The company continued to face headwinds in its coal shipments. Though net earnings grew 2%, its operating ratio, which is its operating expenses expressed as a percentage of revenues, increased 1% due to the negative impacts of higher incentive compensation and volume-related expenses. CSX is targeting an operating ratio in the high-60’s by 2015, by focusing on safety, service, efficiency and above-inflation pricing. 
CSX also reported a slight increase in its expectations for earnings per share in 2013. Earlier, the company believed that the earnings per share would be in line with that of 2012.
Coal Shipments Will Continue To Weigh In On Revenues
Revenue from coal shipments are expected to be down in the fourth quarter due to declining export coal revenue and inventory overhang in the domestic coal business. Though export coal revenue is expected to decline, the volumes have grown 4% for the first seven weeks of the fourth quarter 2013 due to increases in metallurgical coal shipments. 
Domestic coal volumes are still feeling the impact of an inventory overhang. However, the inventory levels have been decreasing for some time. The positive impact of the recuperation of inventory levels will not be seen in the coming quarter since the levels are still far from the past average.
Intermodal Business Is A Long Term Growth Driver For CSX
CSX’s intermodal volumes grew 11% during the first seven weeks of the fourth quarter of 2013, with growth in both domestic and international intermodal.  In addition, in the third quarter of 2013, intermodal revenue grew by 8% driven by increases in volumes and revenue per unit. 
We expect that the company will continue to see growth in the segment due to growing global trade and investment in capacity expansion. CSX estimates a growth of more than 500,000 units this year in its demand for intermodal business. 
Merchandise Shipments To Grow
CSX’s industrial and construction related shipments have grown 11% and 7% respectively, during the first seven weeks of the fourth quarter in 2013.  The industrial shipments are driven by growing chemicals production and automotive sales. Shale gas boom has been responsible for growth in chemical shipments through the year. Not only does it have a positive impact on crude oil shipments but also chemicals and frac sand shipments. Automotive sales have also been increasing throughout the year, positively impacting automotive shipments.
Recovery in housing market drives growth in the housing and construction shipments. Housing starts are currently at its 5-year high and have increased by almost 30% year-on-year.  This will have a positive impact on revenue from merchandise shipments in the fourth quarter.
- CSX CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 16, 2013
- CSX Corporation’s Management Presents at the 2013 Credit Suisse Global Industrials Conference (Transcript), December 4 2013, www.seekingalpha.com
- Housing starts data, www.mortgagenewsdaily.com
Disclosure: No positions