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CSX Corporation (NYSE:CSX), one of the leading rail transportation companies, is slated to release its third quarter 2011 results on Tuesday, October 18, after the closing bell. The current Zacks Consensus Estimate for third quarter earnings per share is pegged at 44 cents, representing an annualized growth of 21.98%.

Second Quarter Flashback

CSX Corp.’s second quarter financial results surpassed the Zacks Consensus Estimate and remained above the year-ago level on strong pricing recovery. Revenue also came in ahead of the Zacks Consensus Estimate and grew 13% year over year to $3.0 billion on improved pricing and modest volume growth.

Agreement of Estimate Revisions

Estimates for the third quarter have been indicating a downward trend over the last 7 and 30 days. Over the last 7 days, out of 23 analysts, one increased and three decreased their estimates. Over the last 30 days, only one analyst moved upward while six made downward revisions.

For fiscal 2011, out of 22 analysts, none made a positive revision in last 7 days but three moved south. Over the last 30 days, no change was registered on the positive side but four made negative revisions.

Similarly, for fiscal 2012, out of 25 analysts, one analyst increased and five decreased their estimates in the last 7 days. Further, one upward and eight downward revisions were made over the last 30 days.

We believe that the downward trend reflects the negative sentiment of the market towards railroad stocks given lower coal demand. A suggested decline in coal shipments (accounted for approximately 40% of total rail shipments) for the second half of the year by Alpha Natural Resources (NYSE:ANR) and Walter Energy (NYSE:WLT) in September spilled worries across the market. Further, the ongoing economic upheaval, affecting the pricing and volume trend also contributed to the downward revisions by most of the analysts.

Magnitude of Estimate Revisions

Over the last 7 and 30 days, the magnitude of the third quarter estimate revisions dropped by a penny to 44 cents.

For fiscal 2011, the Zacks Consensus Estimate remained static at 46 cents over the last 7 and 30 days.

For fiscal 2012, the Zacks Consensus Estimate regressed by a penny over the last 7 days and dropped 2 cents in last 30 days.

Earnings Surprises

With respect to earnings surprise, over the trailing four quarters, CSX Corp. outperformed the Zacks Consensus Estimate at 3.37% on average.

The current Zacks Consensus Estimate for the ongoing quarter contains a 2.27% downside risk. Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimates’ downside risk is measured at 0.59% and 1.53%, respectively.

Our Recommendation

Although CSX’s strong performance in the second quarter was supported primarily by pricing improvement compared to volume growth, we remain concerned about near-term headwinds related to coal demand. Further, the company’s capital intensive nature and unionized workforce, increased competition as well as strict railroad regulation and stiff competition from railroads like Norfolk Southern Corp. (NYSE:NSC) also keep us on sidelines.

Hence, we maintain our long-term Neutral recommendation on CSX Corp. However, the stock holds a short-term (1-3 months) Zacks #4 Rank (Sell).

Source: CSX Corporation Earnings Preview