Declining domestic coal shipments continue to bother stocks in the railroad space. After Union Pacific Corporation UNP cut a sorry figure with regard to domestic coal shipments, it was the turn of another railroad, CSX Corp. CSX, to raise caution on weak coal markets.
In this regard, Chief Financial Officer Fredrik Eliasson voiced his apprehension at the Deutsche Bank global industrials & basic material conference, recently held in Chicago. He stated that domestic coal volumes are expected to decline by at least 5% in 2015. Soft natural gas prices were considered the main culprit responsible for the weakness.
The picture is equally gloomy on the export front. CSX projected at the conference that export coal volumes are estimated to decline to 30 million tons in 2015. Adverse foreign currency movements due to a strong dollar and soft coal prices internationally have induced the declining demand for coal – the single largest revenue generating commodity at CSX. We note that in view of the strong dollar, coal imports from the U.S. have been rendered unattractive. With coal revenues stumbling, the commodity contributed only 22.5% to the company’s top line in 2014 as opposed to 32% in 2011. CSX further stated that overall volumes in the second quarter are down 2% (data till May 29) primarily on coal-related headwinds.
According to the U.S. Energy Information Administration, coal exports have declined mainly due to low fuel prices and soft global fuel demand. Increased output from other coal-exporting nations have also played spoilsport.
Earnings Projection Reiterated
Despite the weak coal business, the company still expects earnings per share in the second quarter of 2015 to be flat or increase slightly on the back of impressive intermodal traffic and strong construction business. The railroad company still expects 2015 earnings to grow in the mid-to-high single-digit range on a year-over-year basis along with meaningful margin expansion. The Zacks Consensus Estimate of earnings for 2015 currently stands at $2.04 per share, reflecting 6.39% growth over the 2014 figure. Moreover, the company is working toward achieving a long-term operating ratio in the mid-60s.
Zacks Rank
CSX Corp. currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader transportation sector are Knight Transportation Inc. KNX and Covenant Transportation Group, Inc. CVTI. Knight Transportation carries a Zacks Rank #2 (Buy) while Covenant Transportation Group sports a Zacks Rank #1 (Strong Buy).
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