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Leading U.S. railroad, CSX Corporation (CSX - Analyst Report), reported third quarter 2012 earnings of 44 cents per share, surpassing the Zacks Consensus Estimate and the year-ago earnings by a penny.
Revenue for the quarter decreased 2% year over year to $2,894 million and fell below our expectation of $3,003 million.
Quarterly operating income dropped 3% year over year to $854 million. Operating ratio (defined as operating expenses as a percentage of revenue) deteriorated 10 basis points year over year to 70.5%.
Performance Across Business Lines
Merchandise revenue increased 3% year over year to $1,609 million. However, carloads remain flat year over year.
Automotive revenue increased 18% on 17% higher volume, attributable to growth in North American automotive production. Phosphates and Fertilizers revenues grew 5% year over year but volumes remained flat due to lower export volumes. Food and Consumer products rose 5% year over year on a 2% growth in carloads, driven by higher shipments of potato and western apples.
Chemical revenue climbed 4% year over year on a 2% growth in volumes, driven by higher fracturing sand shipment, required for natural gas drilling and growth in crude oil shipments. In addition, plastic shipments were also on the rise due to higher demand from packaging and automotive industries. Forest products revenue grew 2% but volumes were flat year over year given weaker market condition in paper business due to substitution effect of electronic media. .
Quarterly revenues from Metals were essentially flat at $155 million and volumes dipped 3% year over year due to a decline in scarp shipments on lower demand from steel plants. Agricultural products revenues plunged 6% year over year on an 8% volume decline given lower shipments of corn and ethanol. Further, emerging market revenues were down 7% year over year on an 8% decline in carloads that were mainly affected by lower salt shipments due to higher inventories.
Coal revenues saw a fall of 17% year over year to $791 million in the third quarter on a volume decline of 16%. Utility coal shipments continued to decline as a result of low natural gas prices. This decline was partially made up for by higher export demand for U.S. thermal coal in the international markets, mostly in Europe.
Intermodal revenue saw a year-over-year increase of 10% on an 8% volume growth. Domestic shipments increased due to capacity growth, higher rate of truck load conversion to rail freight along with new customer wins. International business gained from new customers.
The company exited the third quarter with cash and cash equivalents of $693 million, compared with $580 million in the year-ago period. The long-term debt position slightly improved to $8.3 billion from $8.7 billion at year-end 2011. The company’s debt-to-capitalization ratio stood at 49.4% versus 49% at year-end 2011.
The company continues to expect earnings growth andmargin expansion for 2012 alongside operating ratio expectation of 65% by 2015.
We expect the company to remain focused on growth with increased profitability in most of its product lines, particularly in Intermodal and Automotive. Higher profitability will further support the investments to meet the growing demand in the transportation sector. Additionally, we expect the company to focus on better pricing and fuel cost recovery.
However, we remain cautious on the stock of CSX given the declines in utility coal volumes, which constitute a significant part of its business. Further, 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 have a Zacks Rank of #4 (short-term Sell rating) on CSX Corp. For the long-term the stock has a Neutral recommendation.