CSX Corporation (CSX), the second-largest U.S. railroad, reported second quarter 2011 earnings of 46 cents per share, surpassing the Zacks Consensus Estimate of 44 cents and the year-ago earnings of 36 cents.
Earnings per share shot up 27.8% year over year on pricing improvement across all segments.
Revenue climbed 13% year over year to $3.0 billion and matched the Zacks Consensus Estimate backed by a modest 3% volume growth. However, pricing remained strong, compensating the sluggish volume growth and rising fuel prices.
Operating income leaped 20.6% year over year in the second quarter to a record level of $926 million, driven by higher revenue. Operating ratio (defined as operating expenses as a percentage of revenue) improved 190 basis points year over year to 69.3%.
Performance Across Business Lines
Merchandise revenue and volume increased 10.7% and 2.7% year over year, respectively. Volume for Forest Products grew 8% on strong shipments of pulp board and packaging paper, despite the weakness in construction-related markets. Metals increased 5% on higher shipments of sheet steel for domestic auto production and higher scrap shipments attributable to increased export demand and higher domestic steel production. Chemical registered a mere 3% increase driven by the demand for intermediate products used in manufacturing automobiles and consumer goods.
Automotive volume dropped 1% due to the impact of the Japan disaster on U.S. manufacturers as they faced a short supply of auto parts from Japanese suppliers. However, the decline was partially offset by increased production in the home turf.
Coal revenue saw a year-over-year increase of 15% in the second quarter with volume declining 3% due to decreased utility coal shipments as a result of low natural gas prices and a stockpile that was at or above the normal level. This volume decline was partially compensated by higher export demand for U.S. coal in international markets like Europe, Asia and South America.
Intermodal revenue saw a year-over-year increase of 24% on 8% volume growth. Strong demand in U.S. and overseas markets, as well as new international gains as a result of the intermodal portfolio of service and network offerings, were the catalysts for growth.
Liquidity Position
The company exited the second quarter with cash and cash equivalents of $1,252 million, compared with $633 million in the year-ago period. Long-term debt increased to $8.2 billion from $8.1 billion last year.
Guidance
CSX Corp. stuck to its prior guidance of delivering operating ratio in the high-60s so as to achieve the long-term goal of 65% operating ratio by 2015. The company remained committed to its prior investment plan of $2.2 billion for FY11 for building and enhancing the capacity of the rail network.
Our Analysis
CSX Corp. generated solid financial results in the second quarter supported primarily by pricing improvement compared to volume growth. The pricing improvement highlights the growing market demand for rail-based freight transportation services and higher fuel surcharges that offset steeper fuel prices. We expect the company to remain focused on growth with increased profitability in most of its products lines, particularly in Intermodal and export coal markets. Higher profitability will further support investments to meet growing demand in the transportation sector. Additionally, we expect the company to focus on better pricing to allow fuel cost recovery.
However, we remain cautious on the stock due to the company’s capital intensive nature and unionized workforce, increased competition as well as strict railroad regulation. The company’s primary rail competitor is Norfolk Southern Corp. (NSC), which operates mostly across the length and breath of CSX Corp.’s territory.
Consequently, we are currently maintaining our long-term Neutral recommendation on the stock supported by the Zacks #3 (Hold) Rank.
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