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CSX Corp. (CSX - Analyst Report) is all set to unveil its third-quarter 2012 results on Tuesday, October 16, 2012, after the closing bell. The current Zacks Consensus Estimate for the third quarter is pegged at 44 cents per share, representing an annualized growth of 1.84%.

With respect to earnings surprises, CSX Corp. has outperformed the Zacks Consensus Estimate in the last two quarters out of the trailing four quarters with an average earnings surprise of 3.22%.

Second Quarter Recap

On July 18, 2012, CSX Corp. reported its second-quarter 2012 financial results. The company reported EPS of 49 cents per share breezing past the Zacks Consensus Estimate of 47 cents per share. Earnings increased 7% year over year from 46 cents buoyed by higher revenues from exports coal, intermodal and automotive.

Revenue remained flat year over year at $3,012 million but fell below the Zacks Consensus Estimate of $3,052 million. Operating income grew 2% year over year in the second quarter to $943 million, boosted by improving productivity and effective cost control. Operating ratio (defined as operating expenses as a percentage of revenue) improved 60 basis points year over year to 68.7%.

Agreement of Estimate Revisions

In the last 30 days, 15 out of the 24 estimates went down for the third quarter of 2012 while none increased. Similarly, for the fourth quarter, 12 out of the 23 estimates decreased and none increased.

For 2012, in the last 30 days, 15 out of the 26 estimates went down while only one estimate moved in the opposite direction. Likewise, for 2013, out of 26, there were 12 downward revisions in estimates.

Magnitude of Estimate Revisions

For the third quarter of 2012, over the last 30 days, the current Zacks Consensus Estimate was 2 cents below the previous estimate of 46 cents. Likewise, for fourth quarter, during the last 30 days, the current Zacks Consensus Estimate was just a penny below the earlier estimate of 46 cents.

For 2012, over the last 30 days, the current Zacks Consensus Estimate was 4 cents below the earlier estimate of $1.84. Similarly, for 2013, the current Zacks Consensus Estimate was 4 cents below the earlier estimate of $2.06.

Earning Surprises

In the previous quarter, CSX Corp. reported EPS of 49 cents, which beat the Zacks Consensus Estimate by 2 cents. The current Zacks Consensus Estimates for the ongoing quarter and the upcoming quarter contain downside potential of 4.55% and 4.44%, respectively (essentially a proxy for future earning surprises). Likewise, for 2012 and 2013, the Zacks Consensus Estimate contains downside risk of 1.11% and 1.98%, respectively.

Our Recommendation

Continuous investment in the rail infrastructure coupled with market traction on truck new business in intermodal will drive CSX Corp. going forward. In addition, favorable industry fundamentals, effective cost control measures and higher yield in the non-coal businesses remain the primary catalysts driving earnings upward.

However, we remain cautious on CSX Corp. mainly based on sluggish U.S. economic growth and declines in coal volumes, which constitute a significant part of its business. Furthermore, the company’s capital intensive nature, unionized workforce, increased competition from major railroads like Norfolk Southern Corp. (NSC - Analyst Report) as well as strict railroad regulations keep us on the sidelines.

We maintain our long-term Neutral rating on CSX Corporation. For the short term (1-3 months) the stock holds a Zacks #3 Rank (Hold).


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