CSX Corporation CSX reported third-quarter 2015 earnings of 52 cents per share, beating the Zacks Consensus Estimate of 50 cents.
However, revenues of $2,939 million fell short of our estimate of $3,007 million and also declined 9% year over year owing to weaker coal exports. Third-quarter operating income fell 4% year over year to $933 million. Meanwhile operating ratio (defined as operating expenses as a percentage of revenues) was 68.3% compared with 69.7% in the year-ago quarter. Meanwhile, operating expenses rose 11% year over year to $2,006 million.
Segmental Performance
Merchandise revenues fell 6% year over year to $1,819 million in the reported quarter owing to a 4% volume contraction. The deterioration was also largely due to a 15% revenue decline at the Metals segment.
Coal revenues deteriorated 19% year over year to $583 million on an 18% drop in volumes. The decline in volume was a result of softer global coal demand and a stronger U.S. dollar.
Intermodal revenues dropped 1% year over year to $451 million. On a year-over-year basis, volumes decreased 3% and revenue per user declined 6%.
Other revenues grossed $866 million, down 27% year-over-year.
Liquidity
The company exited the third quarter with cash and cash equivalents of $966 million compared with $961 million at the end of 2014. Long-term debts totaled $10,088 million compared with $9,514 million at the end of 2014.
Guidance
CSX expects to generate mid-single-digit range growth in earnings per share in 2015 while operating ratio is estimated in the mid-60s. The company also expects domestic coal volumes to decline nearly 10% in 2015 while exports for the same period are likely to be 30 million tons. As a result, coal revenues will most likely fall by $450 million in 2015, mainly due to low fuel prices.
Our Take
We believe that declining oil prices has compelled most power plants to substitute coal for cheaper natural gas. Moreover, weaker foreign exchange rates against a stronger U.S. dollar may continue to hurt coal exports for CSX.
In addition, regulatory and competitive pressure from railroad operators like Kansas City Southern KSU, Norfolk Southern Corp. NSC and Canadian National Railway Co. CNI may further dent profits.
Despite such headwinds, CSX is banking on a number of profitable factors that include favorable rail industry pricing, recovery of the construction sector, ongoing truck-to-rail conversion, and expansion of network and terminal capacity. Additionally, the company’s focus on operational improvement is expected to boost results.
CSX currently carries a Zacks Rank #3 (Hold).
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