CSX 2019: 58.4% OR

Written by Andrew Corselli, Managing Editor
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CSX President and CEO James Foote

CSX—the first U.S. Class I to report fourth-quarter and full-year financials—reached an all-time-low operating ratio of 58.4% for full-year 2019.

For full-year 2019, CSX generated net earnings of $3.33 billion, or $4.17 per share, vs. $3.31 billion, or $3.84 per share in 2018, an increase of 1% and 9%, respectively. CSX’s full-year 2019 operating ratio of 58.4% represents a new U.S. Class I railroad record, improving upon last year’s record result of 60.3%.

CSX Corp. announced 4Q19 net earnings of $771 million, or $.99 per share, vs. $843 million, or $1.01 per share in the same period last year. CSX’s operating ratio set a company fourth-quarter record of 60%, compared with 60.3% in the prior year.

Revenue for the fourth quarter decreased 8% vs. prior year to $2.89 billion due to lower volumes and negative mix from coal market headwinds. Expenses decreased 9% year-over-year to $1.73 billion, driven by continued efficiency gains and volume-related savings. Operating income was down 8% to $1.15 billion compared to the same period last year.

“The railroad has never run better and we are delivering great service to our customers,” said James M. Foote, President and CEO. “What is really amazing is how our employees stepped up to produce efficiencies during tough economic conditions.”

“CSX reported solid 4Q19 results, with EPS beating Street estimates and revenue and EBIT only missing slightly,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “However, weak 2020 guidance and top-line outlook were the larger story, with 2020 revenue to be adversely affected by lower coal volumes and yields. We lower our 2020 and 2021 EPS estimates, bring our price target to $79, and would remain on the sidelines.

“CSX reported EPS of $0.99, down 2% y/y but slightly above our and the Street’s $0.96. We note that a favorable tax rate of 21.4% was a roughly $0.03 benefit to EPS; excluding this, EPS would have been in line with our and Street estimates. Operating income of ~ $1.15 billion was below our $1.17 billion estimate and the Street’s $1.18 billion. Revenue came in at $2.89 billion, slightly below our and the Street’s $2.91 billion. The operating ratio (OR) of 60.0% was ~30 bps improved y/y, but was ~10 bps worse than our estimate and ~50 bps worse than the Street’s. The top line miss relative to consensus was in each of CSX’s coal, intermodal and merchandise franchises, with “other” revenue beating slightly.

“The [real story] was management’s weak initial 2020 revenue and OR guidance and soft demand outlook. Management guided full-year 2020 revenue to flat-to-down 2% relative to 2019, well below our +4% estimate and the Street’s estimate of a slight y/y revenue increase. In addition, CSX’s initial OR guidance for 2020 of 59% is worse than our 57.7% estimate at the time of the release. The low revenue guidance is in large part due to weakness in CSX’s coal franchise, the result of lower export demand and benchmark prices as well as low natural gas prices. Management expects coal to be a $300 million revenue headwind, with an added negative that coal is generally known to be a high-margin business.

“It is worth mentioning that CSX was among the most accurate predictors of the weak 2H19 and 4Q19 specifically. Time will tell if its 2020 demand outlook is similarly prescient. Though challenges on the volume side persist, management continues to hold the line on pricing, with pricing on recent contract renewals exceeding blended same-store-sale price.

“We are adjusting our 2020 and 2021 EPS estimates to $4.10 and $4.50 from $4.40 and $4.75, respectively, to account for management’s new outlook. In addition, we publish an initial 1Q20 EPS estimate of $0.93. Continuing to use a 17.5x multiple and our new 2021 EPS estimate, we arrive at our new price target of $79, down slightly from $83, and we leave our Market Perform rating intact at this time. CSX’s weak kickoff to rail earnings is likely going to put a damper on other names.

“We would be buyers of our top rail pick, Kansas City Southern (editor’s note: led by 2020 Railroader of the Year Pat Ottensmeyer) as we believe KCS will outgrow its rail peers.”

Categories: Class I, Freight, Intermodal, News Tags: ,