CSX Corp. Earnings Preview

| About: CSX Corporation (CSX)

CSX Corporation (NYSE:CSX), one of the leading rail transportation companies, is slated to release its fourth quarter 2011 results on Tuesday, January 24, after the closing bell. The current Zacks Consensus Estimate for the upcoming quarter is pegged at 44 cents, representing an annualized growth of 15.55%.

Third Quarter Flashback

CSX Corp.’s third quarter financial results missed the Zacks Consensus Estimate by a penny but were 19% above the year-ago level on strong revenues and fuel recoveries.

Revenue met the Consensus estimate and grew 11% year over year to $3.0 billion on improved pricing that compensated for sluggish volume growth and rising fuel prices.

Agreement of Estimate Revisions

Estimates for the fourth quarter have been reflecting an upward trend over the last 7 and 30 days. Over the last 7 days, out of 22 analysts, one increased and none decreased their estimates. Over the last 30 days, three analysts moved upward while four made downward revisions.

For fiscal 2011, out of 23 analysts, two made upward revisions in the last 7 days but none moved in the opposite direction. Over the last 30 days, of the same number of analysts four moved in either direction.

Similarly, for fiscal 2012, out of 24 analysts, one analyst increased but none decreased their estimates in the last 7 days. Further, there were five upward and two downward revisions over the last 30 days.

We remain encouraged by the current rail market fundamentals that exhibit a bullish trend given striking price improvement backed by truckload conversion to rail intermodal and fuel cost recoveries through higher fuel surcharges. Although the sluggish economy had dampened rail volumes like in any other industry, we expect significant improvement in the company’s rail market share owing to its fuel efficiency over trucking. Further, regulatory pressures on the truck industry like Hours of Service (HOS) and CSA (Compliance, Safety, and Accountability) standards issued by the Federal Motor Carrier Safety Administration (FMCSA) that restricts long hours of service by drivers in order to address safety issues, will result in market share gains for railroad companies.

Magnitude of Estimate Revisions

Over the last 7 and 30 days, the Zacks Consensus Estimate remained unchanged at 44 cents for the fourth quarter.

Similarly over the last 7 and 30 days, the Zacks Consensus Estimate remained static at $1.68 and $1.93, respectively, for fiscal 2011 and 2012.

Earnings Surprises

With respect to earnings surprise, over the trailing four quarters, CSX Corp. outperformed the Zacks Consensus Estimate by an average rate of 1.66%.

The current Zacks Consensus Estimate for the ongoing quarter contains a 2.27% downside risk. For fiscal 2011, the Zacks Consensus Estimates’ upside and downside risk will remain neutral at 0% but for 2012, the Zacks Consensus Estimates’ possibility for upside is 0.52%.

Our Recommendation

We believe CSX, similar to other railroads like Norfolk Southern Corp. (NYSE:NSC) and Union Pacific (NYSE:UNP), should continue to enjoy a good degree of operating leverage in FY11 owing to higher export volumes, improving Intermodal and Merchandize segment, effective cost control measures and improved rail safety measures. Additionally, CSX continues to invest in its infrastructural development program, which is expected to improve margins in the future. Furthermore, shareholders are expected to benefit from higher returns on effective utilization of excess liquidity and a strong balance sheet position.

However, we remain concerned about the near-term headwinds related to soft coal demand, which represents more than 30% of the company’s freight business. The current global volatility that has affected mining activities, the sudden drop in demand from the Asian markets due to problems over quality as well as the harsh weather conditions in the Pacific region have resulted in lower coal shipments across the globe. Additionally, the recovery of the Australian mine from last year’s flood also poses a threat to U.S. coal exports this year. On the domestic front, lower natural gas prices and seasonality impacts have dampened coal demand and the trend is expected to continue in the near term.

Further, as per a recent report, the company registered a 4.9% decline in volume mostly in agricultural products due to reduced demand for feed shipments owing to decreased production by poultry and pork producers. Higher corn prices resulting from lower corn production also led to reduced agricultural shipments. Additionally, the company’s capital intensive nature and unionized workforce, railroad regulation and stiff competition also keep us on the sidelines.

Hence, we maintain our long-term Neutral recommendation on CSX Corp. supported by a Zacks #3 Rank (implying a Hold rating on a short term basis).

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