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CSX Earnings Rise Despite Coal Woes

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CSX Corporation (CSX - Free Report) reported third-quarter 2013 earnings of 46 cents per share, beating the Zacks Consensus Estimate of 42 cents and improving from the year-ago figure of 44 cents.

The company’s third-quarter revenues were $2,999 million, up 4% from $2,894 million in the prior-year quarter. The results also surpassed the Zacks Consensus Estimate of $2,965 million on volume expansion and higher pricing along with improvement in operating efficiency and services.

Operating income remained flat year over year at $854 million, while operating expense was $2,145 million, down 5%. Operating ratio (defined as operating expenses as a percentage of revenue) was 71.5%, up 100 basis points.

Performance Across Business Lines

Merchandise revenues increased 7% year over year to $1,719 million in the reported quarter, supported by 2% growth in revenue per unit (RPU) and 5% expansion in volumes. The improvement in volume was driven by better performing Waste and Equipment (up 33%), Chemicals (up 12%), Metals (up 5%) and Forest Products (up 5%).

Coal revenues were down 9% year over year at $720 million on 7% volume decline. RPU decreased 2% on a year-over-year basis. The weakness was due to lower domestic coal shipments demand from power plants softened and stocks piled up. Export coal also suffered a significant setback due to lower shipments of U.S. thermal and metallurgical coal following global oversupply and lower prices.

Intermodal revenues rose 8% year over year to $431 million, driven by highway-to-rail conversion in the domestic market as well as increase in service lanes and customer base. On a year-over-year basis, volumes increased 6% and RPU rose 2%.

Other revenues were $129 million, up 36% year over year.

Liquidity Position

The company exited the third quarter with cash and cash equivalents of $591 million compared with $784 million at the end of 2012. Long-term debt decreased to $8,787 million from $9,052 million at the end of 2012.


CSX expects marginal earnings per share growth in 2013 from the prior-year level. Amid a sluggish economic environment and volatile coal market scenario, CSX aims to bring down its operating ratio to the high 60s range by 2015 and subsequently to the mid 60s.

Our Take

We believe CSX has a number of profit generating factors that include favorable rail industry pricing, recovery of the construction sector, and expansion of network and terminal capacity. Additionally, the company’s focus on operational improvement and rendering better services to customers at affordable costs will likely drive profitability.

However, competitive pressure, a unionized workforce and increased railroad regulation may pose significant threats to the company’s growth. CSX operates with other railroad companies like Canadian Pacific Railway Ltd. (CP - Free Report) , Norfolk Southern Corp. (NSC - Free Report) and Kansas City Southern (KSU - Free Report) , and has a Zacks Ranks #3 (Hold).

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