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CSX Corporation’s (CSX - Analyst Report) second-quarter 2014 earnings of 53 cents per share surpassed the Zacks Consensus Estimate by a penny, simultaneously exceeding the year-ago number of 51 cents.

 

Revenues of $3,244 million fell marginally below the Zacks Consensus Estimate of $3,248 million but increased 7% year over year buoyed by 8% growth in volume.

Second quarter operating income rose 6% year over year to $997 million, resulting in an operating ratio (defined as operating expenses as a percentage of revenues) of 69.3%, up 20 basis points (bps). Operating expense decreased 7% year over year to $2,247 million.

Performance across Business Lines

Merchandise revenues grew 11% year over year to $1,971 million in the reported quarter driven by 8% and 2% expansion in volume and revenue per unit (RPU), respectively. Volume growth was supported by Chemicals (up 18%), Waste and Equipment (up 14%), and Agricultural Products (up 11%).

Coal revenues dropped 3% year over year to $744 million on 9% decline in RPU. Coal volumes increased 6% year over year in the reported quarter. Volume growth was mainly supported by higher domestic coal demand offset by decrease in export coal demand as a result of weak global market conditions.

Intermodal revenues rose 6% year over year to $449 million driven by highway-to-rail conversions in the domestic market, increase in service lanes and customer addition. International intermodal business also performed well on continuous strength in existing customers and increased global container shipment transportation to inland routes. On a year-over-year basis, volumes increased 7% while ARPU declined 2%.

Other revenues were $80 million, up 16% year over year.

Liquidity Position

The company exited the second quarter with cash and cash equivalents of $573 million compared with $592 million at the end of 2013. Long-term debt decreased to $8,410 million from $9,022 million at the end of 2013.

Dividend

At the end of the quarter under review, total dividend paid amounted to $311 million as against $296 million in the same period a year ago.

Guidance

CSX Corp. reaffirmed its financial projections. While, the company expects modest earnings growth in 2014, it remains confident of retaining double-digit earnings and margin expansion in 2015 and beyond. Further, the company maintains its long-term operating ratio target in the mid-60s range.

Further, the company expects to boost capital investment by another $100 million in 2014, which will be dedicated toward key infrastructure developments and freight car purchase to drive long-term growth.

Our Take

We believe CSX has a number of profit generating factors that include favorable rail industry pricing, recovery of the construction sector, ongoing truck-to-rail conversion as well as the expansion of network and terminal capacity. Additionally, the company’s focus on operational improvement will likely drive profitability.

However, a subdued coal business that is resulting in declining coal revenues as well as regulatory and competitive issues could hurt the company’s performance in the near term.

CSX currently carries a Zacks Ranks #2 (Buy).

Other Stock

Other transportation stocks with a favourable Zacks Rank #2 include KansasCity Southern (KSU - Analyst Report), Canadian Pacific Railway (CP - Analyst Report) and Union Pacific Corporation (UNP - Analyst Report).

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