The third-largest U.S. railroad, CSX Corporation (CSX), reported third quarter 2011 earnings of 43 cents per share, missing the Zacks Consensus Estimate by a penny. But the earnings figure increased 19.0% year over year from 36 cents, thanks to higher profits on solid pricing and fuel surcharges that offset higher costs.
Revenue climbed 11% year over year to $3.0 billion backed by a modest 1% volume growth, and matched our expectation. Also, pricing remained strong, compensating for the sluggish volume growth and rising fuel prices.
Operating income grew 6% year over year in the third quarter to $878 million driven by higher revenue. Operating ratio (defined as operating expenses as a percentage of revenue) detoriated 130 basis points year over year to 70.4%
Performance Across Business Lines
Merchandise revenue and volume increased 10% and 2% year over year, respectively, in the reported quarter. Metals volume increased 15% on higher shipments of sheet steel for domestic auto production and higher scrap shipments attributable to increased export demand and higher domestic steel production. Forest Products’ volume registered a 9% growth on strong shipments of pulp board and packaging paper despite the weakness in construction-related markets. Automotive volume upped 4% due to higher North American automotive production. Chemical volumes remained flat year over year.
Coal revenue saw a year-over-year increase of 16% and a 1% dip in volume 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. The 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 15% on 6% volume growth. Domestic shipments increased due to higher rate of truck load conversion to rail freight. This growth was largely offset by declines in International volume due to lower peak season shipments than a year ago.
Liquidity Position
The company exited the third quarter with cash and cash equivalents of $580 million, compared with $636 million in the year-ago period. Long-term debt remained flat sequentially at $8.2 billion.
Guidance
CSX Corp. maintained to its long-term target of achieving 65% operating ratio by 2015.
Our Analysis
CSX Corp. generated solid financial results in the third quarter supported primarily by higher value of rail freight demand. The pricing improvement highlights the growing market demand for rail-based freight transportation services and higher fuel surcharges that offset higher costs and steeply rising fuel prices. We expect the company to remain focused on growth with increased profitability in most of its products lines, particularly in intermodal and 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 CSX Corp. However, the stock holds a short-term (1-3 months) Zacks #4 (Sell) Rank.
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