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Can CSX Improve Margins In The Coming Days?

|About: CSX Corporation (CSX)

Summary

CSX announced year end results recording consistent growth in both revenues and net income after the company spent the past few years trying to improve its margins.

A lot of the changes in expenses faced by CSX Corp are homogeneous to the industry which only leaves management as the sole factor through which the company can improve.

Coal volumes have fallen as demand for coal has dipped in the past few years and been replaced with a greater demand for natural gas.

The advantage of falling fuel prices has been partially offset by lower demand for railroad transportation which has always been seen as a comparatively cheaper way to transport goods.

Transport goods.The company’s longtime COO Oscar Munoz has been named as president where he will continue to serve in both positions.

CSX Corporation (NYSE:CSX) had a fairly good year in 2014 as the company managed to continue improving its margins. The company is a Class I railroad that operates across the Eastern United States while simultaneously offering warehousing management for some of its customers. In an industry where expense patterns are simultaneously experienced due to their homogeneous nature, how much more efficiently a railroad company like CSX Corp can conduct its operations, goes a long way in improving profits.

When you look at the related industry costs and expenses it is easy to see that there is hardly any volatility expenses that can make one company better off than the other. Besides obviously independent costs, such as financing, every other cost seems to affect the industry as a whole. Where CSX Corp benefited from lower thermal coal and crude oil prices, so did Union Pacific Corp and all of its other rivals. So left with no other choice CSX has decided to increase its pricing of contracts in 2015 to help improve its margins as well as achieve growth, a feat they are optimistic about. And they have a right to be; the US economy is well on its way to recovery and analysts expect interest rates to start rising this year, even though the Federal Reserve did send a signal that it does not intend on raising rates before summers. Either way consumer confidence and thus spending is on the rise again or it should pave the way for CSX to increase the price on its contracts.

The company did manage to end the year on a high note as net earnings for the quarter went up by 15% to $491 million from $426 million in the same quarter last year, however net earnings for the whole year went up by a mere 3% in comparison. A paradoxical scenario emerges when we consider falling fuel prices. Generally railroad transportation, especially for goods and services, is considered to be a cheaper alternative for long distance travels. A significant number of CSX's engines run on diesel and common sense would tell you that lower crude oil prices would help the company, however with fuel prices at a historic the benefit of low fuel prices on the company's income statement is only marginal as its strength to attract more business is insulated by the very nature of the operation i.e. relatively cheap transportation. Another fuel source that caused the company to lose $800 million in revenues over the past 2 years was coal, a commodity that has made CSX struggle at times. The decline in coal transportation started off in 2012 when coal prices were high in the early part of the year, but around the same time natural gas prices went down to below $2/mmbtu on the Nymex. The combination of the two price trends of the commodities along with a push from environmental groups forced many companies to convert their electricity generating units to gas based rather than coal based, in turn resulting lowered coal transportation. Even though coal prices are now at nearly half the price they were in early 2012 it is unlikely that coal transportation related revenues will rise for CSX, but that should not be a worrying scenario for the company as this is just one of those factors that is affecting the whole railroad industry and not just one company in particular. Moreover exported coal makes up only about 4% of CSX's volume, which translates into a risk of -0.05%. With more consumers in the market demand for transportation of goods is bound to increase proportionately. The company added 200 locomotives in the last year and is on its way to add about 250 more units this year in an effort to improve dwell time, which has been troublesome for the company. Thus the addition of modern locomotives to the company's list of assets is a good sign that the board is interested in rectifying its weaknesses.

Despite being a company affected by the cyclical patterns of the economy, there are certain international factors that are likely to help the railroad company. Particularly, the quantitative easing programs launched by the ECB and the Bank of Japan should help the US economy out in the coming year. Investors from these regions will most likely use the US for investment opportunities which should result in an inflow of funds. This excess money, boosted in part by the relatively strong US dollar, will most likely help railroad companies alike.

In more recent news the board of directors announced that Oscar Munoz has been named as president of CSX Corp, where he will continue to serve as the chief operating officer. The news helped the stock price continue its upward trend letting it cross the $36 per share mark. Munoz has been pivotal in reshaping the company. His insight helped the company quickly rebound after the financial crisis of 2008, while the stock price during his span at the company went from $5 per share to its current high of $36.42 per share. According to Doyle Publishing Ltd the main tailwind for CSX Corp is the US population's forecasted growth for the next 20 years and the corresponding increase in demand this surge will bring.

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.