Earnings Preview: CSX Corporation

CSX Corporation (CSX - Analyst Report), one of the leading rail transportation companies, is slated to release its second quarter 2012 results on Tuesday, July 17. The current Zacks Consensus Estimate for second quarter earnings per share is pegged at 47 cents, representing an annualized growth estimate of 1.98%.

First-Quarter Flashback

CSX Corp.’s first quarter earnings of 43 cents surpassed the Zacks Consensus Estimate as well as year-ago earnings of 35 cents, driven by higher profits on solid pricing and fuel surcharges as well as higher volumes from Intermodal and Merchandize segments.

Revenues increased 6% year over year to $2,966 million but fell below our expectation.

Agreement of Estimate Revisions

For the second quarter, of the total 22 estimates, none move upward or downward in the last 7 days. However, over the last 30 days, 3 estimates moved upward and 2 moved down.

Similarly, no change in revisions was registered in the 24 estimates for fiscal 2012 in the last 7 days. Over the last 30 days, 3 estimates moved north while none moved south.

For fiscal 2013, out of 24 estimates, no movement was registered in either direction in the last 7 days. Over the last 30 days, one estimate moved up and 2 moved down.

Based on the estimate revisions we can project that analyst remains encouraged about the near-term prospects of CSX Corp. despite the domestic utility coal headwinds that continue to affect the company.

We believe that favorable rail industry pricing, fuel recoveries and operational improvement will aid CSX Corp.’s top-line growth and drive earnings going forward. We remain optimistic on accelerated growth in the company’s major segments, namely Intermodal, Merchandize and Coal.

Moreover, we expect that strength in highway-to-rail conversion, continued success in the UMAX interline container program and new market opportunities will aid growth going forward. International volume is expected to be driven by new business gains, aided by an improved portfolio of service and network offerings coupled with the new Maersk deal. In Merchandize, industrial shipments are expected to remain strong driven by growth in Automotive and Metals products.

Oil and gas-related growth will aid metal and chemical shipments. The construction sector is expected to improve, driven by the recovery in multi-family housing. Coal volumes are expected to remain strong, offsetting lackluster domestic utility volumes with higher utility coal exports, mostly to Asian and European markets.

Magnitude of Estimate Revisions

Over the last 7 and 30 days, the magnitude of the second quarter estimate revisions remained unchanged at 47 cents.

Similarly, for 2012, the Zacks Consensus Estimate remained static at $1.83 over the last 7 and 30 days.

For 2013, no change was observed over last 7 and 30 days and the earnings estimate remained constant at $2.07.

Earnings Surprises

With respect to earnings surprise, over the trailing four quarters, CSX Corp. had a positive surprise with the average being 3.29%.

The upside potential for the second quarter remains flat at 0.00%. Similarly, for fiscal 2012, the Zacks Consensus Estimates’ downside risk is measured at 1.64%. For 2013, upside potential for the stock is 0.97%.

Our Recommendation

Despite CSX’s strong performance in the first quarter supported primarily by pricing improvement compared to volume growth, we remain concerned about the company’s near-term headwinds related to coal demand. Further, the company’s capital intensive nature and unionized workforce, increased competition as well as strict railroad regulation and stiff competition from railroads like Norfolk Southern Corp. (NSC - Analyst Report) also keep us on sidelines.

Hence, we maintain our long-term Neutral recommendation on CSX Corp. supported by Zacks #3 Rank (Hold).