Tuesday, July 14, 2009

CSX 2Q beats Street despite 20% earnings drop

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CSX’s second-quarter earnings decline of 20% nonetheless beat Wall Street consensus estimates, as the company announced earnings of $308 million, or 78 cents per share, compared with $385 million, or 93 cents a share, in the second quarter of 2008. Revenue fell 25% to $2.19 billion.

Dahlman Rose & Co. cautioned that the earnings per share results, “when stripped of $0.06 per share in discontinued operations related to the [sale of the] Greenbrier resort ... came in at $0.72.” But even that, Dalhman Rose said, was “above our estimate of $0.66" and the consensus estimate of 62 to 64 cents per share.

Morgan Stanley analysts, though even more cautiously noting “$0.59 may be a cleaner number” for second-quarter earnings per share, also allowed that CSX generated a “solid performance, all things considered,” and added, “CSX remains a top pick in our freight transport universe.”


“While the economy continues to significantly impact our business, there are some signs that we may be seeing the bottom in many markets,” said CSX Chairman, President, and CEO Michael J. Ward.

Analysts said CSX has acted aggressively to control costs, but some see continued pressure on pricing. Dalhman Rose said the pressure is most acute in the intermodal sector, affecting CSX’s operating ratio.

Said Dahlman Rose, “We believe CSX Intermodal has had to resort to cutting rates in an attempt to remain competitive with the very aggressive trucking market. While operating expenses declined 17% to $255 million, it was not enough to offset the steep drop in revenues for the segment, bringing the operating ratio up over 730 basis points to 87.6%.”

In a related development, the United Transportation Union said that the impact of furloughs will be lessed for some CSX workers under an "innovative furlough retention board agreement." Furloughed employees placed on each furloughretention board will be guaranteed four days of work each bi-weekly payperiod, retain health-care insurance,  continue buildingseniority and Railroad Retirement credits, remain current for ruleexaminations and qualifications, and recalled to active serviceunder a pre-determined mathematical formula. UTU members placed on continuous employment boards or furloughretention boards also are able to pursue part-time employmentelsewhere, with knowledge that their families are protected, and thatwhen the recession ends, they will return to full-time employment with CSX. These agreements do not impact the operation of extra boards. The agreement is similar to a continuous employment board agreement negotiated with Union Pacific.

"In negotiating these agreements, UTU officers have stressed to thecarriers that short-term economic gains from furloughs could backfireduring the peak vacation season and implementation July 16 of newhours-of-service regulations—both of which will limit availabilityof qualified operating crews," UTU noted. "Agreements such as UP's continuous employment boards andCSX's furlough retention boards lessen the likelihood that youngeremployees will depart the railroad permanently, triggering, eventually,an expensive search for new hires who then must be trained fromscratch."

UTU said it is seeking similar agreements with other major railroads, including BNSF and Norfolk Southern.

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