CSX Beats by Controlling Costs

CSX Corp. (CSX - Analyst Report), the first railroad to report earnings this quarter, posted diluted EPS from continuing operations of $0.72. This compares to consensus of $0.62 and our estimate of $0.70. This good performance largely reflected strong cost-control as revenues fell sharply during the quarter and were below our estimate.

Total revenues declined 25% to $2,185 million from $2,907 million on a 21% drop in volume as almost all businesses experienced larges declines, with the worst performances in metals, coke and iron ore, automotive and international intermodal. Moreover, a $223 million drop in fuel surcharge recovery also contributed to lower revenues. Revenue per unit witnessed a 5% falloff as all segments reported decreases, except chemicals (up 1%) and coal (up 2%).

Operating expenses fell 27% year over year to $1,603 million as most line items posted declines related to weaker business volumes, cost management programs, and lower oil prices. In fact, the majority of the $587 million operating cost reduction was related to a $352 million, or 66%, decline in fuel costs.

The company’s operating margin improved 190 basis points, decreasing to 73.4% from 75.3% in the year-ago quarter.

While CSX is seeing signs that many markets are bottoming, headwinds abound:

In coal, demand continues weak, utility stockpiles are higher than target, and natural gas prices are low.

In merchandising, housing, construction and the industrial sector are likely to remain weak and offset any benefits from stabilization in certain merchandise markets and the agricultural sector.

In automotive, auto restructuring has hurt volumes, though CSX believes this could moderate in coming quarters.

Intermodal continues to suffer from low global trade and a weak truck market. Given this backdrop, CSX expects double-digit volume declines again in the third quarter.

We have a Hold recommendation on CSX. The current Zacks rank is 3, indicating no clear directional pressure on the share price over the near term. In morning trading, CSX is up over 5% from yesterday’s closing price of $32.54.

Read the full analyst report on CSX