CSX Corporation (CSX), the second-largest U.S. railroad, reported its first quarter 2011 earnings of $ 1.06 per share surpassing the Zacks Consensus Estimate of $ 1.04 and the year-ago earnings of 78 cents. Earnings per share shot up 36% year over year on solid growth across all segments despite a steep rise in fuel cost.
Revenue climbed 13% year over year to $ 2.8 billion in the reported quarter, and scaled past the Zacks Consensus Estimate of $ 2.7 billion on 7% volume growth. Most of the product lines, particularly automotive and Intermodal, registered volume growth.
Operating income leaped 22% year over year in the first quarter to $ 773 million driven by higher revenue and increased profit. Operating ratio (defined as operating expenses as a percentage of revenue) improved 210 basis points year over year to 72.5%.
Performance Across Business Lines
Merchandise revenue and volume increased 12% and 7% year over year, respectively, in the reported quarter. Growth in North American light vehicle production, driven by higher sales, led to a 20% increment in automotive volume. Metals increased 10% attributable to strong shipments of sheet steel for auto production and higher scrap steel.
Forest Products’ volume also registered a 10% growth on strong shipments of pulp board and packaging paper despite the weakness in construction-related markets. Chemical grew a modest 4% driven by healthy demand for intermediate products used in manufacturing automobiles and consumer goods.
Coal revenue showed the largest year-over-year increase of 19% in the first quarter withvolume growth of 3% attributable to higher export shipments on a surge in demand for U.S. metallurgical coal in Europe, Asia and South America. However, Utility coal shipments remained lackluster due to diminishing electricity generation in Eastern U.S.
Revenue in the Intermodal segment saw a modest year-over-year increase of 4% on 11% volume growth. The strengthening of the U.S. economy and new international gains as a result of the intermodal portfolio of services and network offerings led to the volume growth.
Liquidity Position
The company exited the first quarter with cash and short-term investments of $ 590 million, compared with $ 1.3 billion at the end of 2010. Long-term debt decreased to $ 7.6 billion from $ 8.1 billion last year.
The company repurchased $ 300 million worth of shares in the first quarter of 2011 and completed its $ 3 billion share buyback program.
Guidance
CSX Corp. stuck to its prior guidance of delivering operating ratio in the high-60s so as to reach the long term goal of 65% by 2015.
Our Analysis
CSX Corp. generated solid financial results in the first quarter supported by economic growth. We expect the company to remain focused on growth with increased profitability in most of its products lines, especially emphasizing on Intermodal.
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 inflation and rising 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 increased railroad regulation. The company’s primary rail competitor is Norfolk Southern Corp. (NSC), which operates mostly across the length and breadth 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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