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Summary

  • CSX was able to generate $3.2 billion revenue during the second quarter of the fiscal year 2014, an increase of 7% on the back of solid volume growth.
  • The company was able to achieve promising growth on the back of economic momentum in majority of the markets and a shift in the energy markets.
  • The company’s operating margin of 30.73% experienced a minor dip while net margin was down by 80 basis points to 16.31%.
  • CSX is working on expanding intermodal business by increasing service offerings and undertaking strategic investments. Planned investment in two terminals during 2014 will increase annual lift capacity by 350,000.
  • Based on the positive economic environment combined with the company’s strategic investments, CSX is in a good position to exploit the opportunities that are coming its way.

According to the American Association of Railroads "AAR", railroads stand alone make up to 40% of the intercity freight volume. Apart from being the most popular mode of freight transportation, it is also an efficient and cost effective option for the consumers. CSX Corp. (NYSE:CSX) is amongst the nation's leading transportation companies which provides traditional rail service and transport of intermodal containers and trailers. The company has recently announced its second quarter results for the fiscal year 2014.

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Source: American Association of Railroads, 2014

Let's take a look at whether the company has benefited from the rising demand curve for its services and its future growth prospects.

Recent Performance At A Glance

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Source: Earnings Presentation Q2 2014

Utilizing its operational capacity at 69.3%, the company was able to generate $3.2 billion revenue during the second quarter of fiscal year 2014, an increase of 7% compared to the corresponding period last year. This increase was primarily volume driven which reached roughly $1.8 billion loads with the highest increase being contributed by the merchandising segment. However, revenue per unit was slightly lower. The company was able to achieve promising growth on the back of economic momentum in majority of the markets and a shift in the energy markets. Purchasing Managers Index "PMI" was reported to be 55.3 in the month of June where surpassing 50 shows economic expansion. The index has been going up from the past one year. Additionally, Customer Inventories Index "CII" stood at 46.5, which highlights the fact that stock levels are low and need to be replenished leading to higher demand for rail service.

Higher production of corn and soybean led to the drop in U.S. grain prices which resulted in higher number of grain export shipments. More crude oil was shipped to refineries during the quarter on the back of higher supply of cheap crude from shale drilling. Coal shipments also increased domestically due to market gains and utilities reloading their stocks as higher gas prices proved to be tailwind for CSX. On the international front, CSX was unable to compete well as API2 benchmark for thermal coal was priced below $75 per ton. Intermodal revenue growth was contributed by highway-to-rail conversions and robust demand.

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Source: Earnings Presentation Q2 2014

The company's operating margin of 30.73% experienced a minor dip while net margin was down by 80 basis points to 16.31% in the quarter under discussion primarily due to higher depreciation charge on the back of higher investments in assets. Rent paid on equipment had also shot up by 19% mainly due to higher freight car rates, higher volume and longer duration of car cycles. The fuel lag proved to be a headwind during the quarter resulting in additional bottom line shrinkage of $9 million. More labor was hired to cater to the additional demand and the higher cost also reflected the inflationary impact.

Leader In Safety

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Source: Earnings Presentation Q2 2014

During the second quarter of 2014, the train accident rate plunged to 2.07 from 2.28 in the same period last year and the personal injury rate remained flat at 0.90, reflecting CSX's commitment towards employee safety and quality management of its transportation service.

Future Outlook

Merchandising

Agricultural goods transportation is expected to gain from prior year's record harvest. Chemical transportation will sustain its growth momentum as CSX is working on exploiting the opportunities created by expansion in the U.S. oil and gas industry. I foresee growth in the automotive market on the back of incremental growth of 9% in the North American light vehicle production during the next quarter.

Coal

Demand for domestic coal volume is likely to drive the demand in this segment as utilities continue to replenish inventories. The company also plans to invest capital in a new coal unit train processing facility to hold up the incremental growth coming from the Illinois basin. Export demand of coal may remain substantially lower on the back of soft global market conditions.

Intermodal

Source: Earnings Presentation Q2 2014

The company is working on expanding its intermodal business by increasing the service offerings and undertaking strategic investments which comprise of the Montreal terminal, which is expected to become operational by the end of this year. The company has also invested in a terminal in Florida during the second quarter. Together, the two terminals are anticipated to increase the annual lift capacity by 350,000. Moreover, the development of the Northwest Ohio facility will enhance its capacity by 50%. These developments will aid CSX in supporting the demand flowing in from highway-to-rail conversions. Further, the company continues to invest in its locomotives resulting in an increase of 10% in the locomotive count to cater to the rising customer demand.

Conclusion

Based on the positive economic environment combined with the company's strategic investments, CSX is in a good position to exploit the opportunities that are coming its way.

Source: CSX: Well-Prepared To Benefit From The Rising Demand Trend