One of the leading railroads in the U.S., CSX Corporation (CSX) has announced an estimated loss of $10 million to $15 million in its fiscal 2011 earnings due to the recent Hurricane Irene.
The impact of the hurricane has not only jeopardized the airline industry but has also taken a massive toll on railroads and other freight business that were delivering promising results backed by improved pricing and market share gains.
Despite the prevailing economic uncertainties, railroads like CSX Corp. and NorfolkSouthern (NSC) witnessed a favorable demand trend that led to continued earnings growth in the first half of the year. However, the current projection of restricted growth should not surprise investors as inclement weather conditions coupled with staggering fuel prices remain significant headwinds to the industry.
During the first quarter of 2011, CSX Corp’s service metrics declined drastically, primarily affecting the merchandise market, one of its three major markets. However, the company resorted to improve its service levels by adding headcount and locomotive resources. Notably, the improvement in service levels is estimated to support 28% earnings growth in 2011.
We believe the improving underlying fundamentals, cost control measures and service levels along with pricing recoveries including fuel surcharges will support CSX’ operating ratio target of 60% in 2011 and 65% within 2015 as well as drive earnings growth of 20% till 2015.
However, the possibility of related expenses such as increasing headcounts and huge capital deployment on improving infrastructure taking a toll on the company’s overall cost structure and margin growth in the near term cannot be completely ruled out.
Further, the recent weather disruption along with uncertain market conditions in utility coal as well as housing market also remain unfavorable for the company, indicating a weaker earnings over the near term.
Consequently, we have a Zacks #3 Rank (Hold) on the stock for the near term that is supported by our long-term Neutral recommendation.
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