CSX: There Are Concerns

| About: CSX Corporation (CSX)

Summary

CSX is still down from my buy call over a year ago but is starting to chug along.

Q3 earnings are out and I discuss the results.

Recognizing the concerns.

I first got behind CSX Corporation (NASDAQ:CSX) back in April of 2015 with a buy call as its rail network connects every major city in the eastern United States and connects to over 200 short-line railroads and more than 70 ports. Long story short, there's demand for its reach. I liked it as a long-term bet because it was improving efficiencies and delivering results at the time. Unfortunately, I had recommended the stock at $32.92. But now, finally, the stock is clawing back, and the call is nearly even. However, the name pulled back heavily from that call to hit a 52 week low of $21.32. But things may finally be on the mend.

Why? I will say that like other names, the stock will ebb and flow, but the name has escaped bear territory. Further, the company was somewhat unfairly tied to oil, and oil has rebounded a bit from its lows, though the connection to oil pricing seems to have weakened in the last 6 months. Now, despite the pressure the name was once under, the stock is up 44% from its 52 week low. I want to add that the company has actually been delivering. As you well know, Wall Street is about expectations and for the last 3 months or so the stock price action has suggested the Street expects some positive changes for CSX. That said, CSX just announced Q3 earnings and it was a good quarter for the company, which may translate to some momentum for the name.

Of course, we have to examine expectations in the face of reality. That said, the company beat on the top line with revenue coming in at $2.71 billion, which beat by $20 million. However, it was down 7.8% year-over-year. Further, CSX saw Q3 2015 net earnings of $455 million, which was a 10% decline from the $507 million last year. This translates to $0.48 per share this quarter (down from $0.52 last year), but these earnings were a nice beat of $0.03 versus consensus estimates thanks to better efficiencies and the reduced share count on account of CSX's buyback program.

Of course we must examine the sales figures. Despite being down year-over-year, there were some pockets of growth for the company. I will add that CSX was helped by a more favorable pricing environment versus last year. But these were offset by a shift in business mix. There was also an 8% volume decline, driven by a huge 21% decline in coal shipments. The strong US dollar of course hasn't helped many companies domestically, but the company saw some growth across several of its markets. I was pleased to see expenses drop 7%. That is a major driver of the company managing to see its earnings surpass estimates.

Expenses for fuel were significantly lower year-over-year and this is only a positive catalyst for the company, yet for the stock, anything remotely associated with oil has been punished as I alluded to above. Of course even with the company's cost savings initiatives, CSX saw operating income of $841 million, which was down 10% year-over-year. That said, the all-important operating ratio came in at 69%, which was went up 70 basis points versus last year. Even with the rise, this continues to be one of the lowest I have seen out of the company in years.

While this is a beat of a quarter, the company has been struggling to get it together and deliver solid results. There are concerns. Concerns with low commodity prices which are impacting volumes. Of course the more material CSX has to transport, the more it can effectively price. Concerns with an economic recovery that has been shaky and slow at best, but CSX keeps chugging along. The decline in fuel prices has been a tremendous catalyst for the company in terms of expenses, but with a strong U.S. dollar and a questionable economy, these concerns have not been alleviated, despite the company attempting to best position itself for this poor economic climate. And that said, for 2016 as a whole, the company expects earnings to come in below 2015 earnings, and by all accounts it will. This lack of growth is a concern and will keep the stock down. However, the company also continues to expect meaningful margin expansion as it progresses towards a full-year operating ratio in the mid-60s longer-term, while focusing on shareholder returns. What I think we need to do is wait it out. The cycle hasn't even begun to ramp up, and until there is a rebound in commodity prices, expect more of the same.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.