CSX: ‘Building Momentum’ in 2Q23

“We look forward to meeting the opportunities ahead in the second half of the year and over the long term as we position CSX for sustainable, profitable growth,” CSX President and CEO Joe Hinrichs reported July 20.

“The ONE CSX team continued to build momentum this quarter as our merchandise and coal businesses continued to demonstrate significant volume gains,” President and CEO Joe Hinrichs said July 20 during the Class I railroad’s second-quarter 2023 financial report. “Though intermodal activity remains challenged, our strong service performance distinguishes us in the marketplace and is attracting shippers to our network.”

Following are highlights of CSX’s second-quarter 2023 results:

• Revenue totaled $3.70 billion, a 3% decline year-over-year “as lower fuel prices, reduced supplemental revenue, a decline in export coal benchmark prices, and a decrease in intermodal volumes more than offset the effects of volume growth in coal and merchandise and solid gains in merchandise pricing,” the railroad reported.

• Operating income came in at $1.48 billion, falling 13% from second-quarter 2022’s $1.70 billion.  

• Net earnings were $996 million (or $0.49 per diluted share), down 15.6% from second-quarter 2022’s $1.18 billion (or $0.54 per diluted share). Last year’s results included a $122 million gain ($0.04/share after-tax) related to the commonwealth of Virginia property sale agreement.

• CSX reported an operating ratio of 59.9%. In second-quarter 2022, the operating ratio was 55.4%, and included “the effects of lower real estate gains, the acquisition of Quality Carriers and higher fuel prices,” CSX said at that time. The operating ratio came in at 43.4% in second-quarter 2021.

2023 Outlook

CSX provided the following guidance update for 2023:

• “Low single-digit revenue ton-mile growth for the full year, driven by merchandise and export coal.” According to the railroad, merchandise volume growth will be supported by service recovery, strength in automotive and minerals, and customer wins; full-year coal volume will be up on higher export shipments, and domestic coal will be softer over the second-half of the year with lower natural gas prices; and domestic intermodal activity is expected to gain momentum over the second half, and “there are no signs yet of positive inflection for international intermodal.”
• “Pricing reflects higher inflationary environment; revenue headwind from intermodal storage and lower international coal benchmark prices.” The railroad said supplemental revenues are still anticipated to decline by approximately $300 million, with greater year-over-year declines in the second-half of 2023; and lower export metallurgical coal benchmarks are expected to impact revenue per unit over the second-half.
• “Focus on efficiency gains to counter strong inflationary pressures.”
• “Capex still expected to be approximately $2.3 billion, with increased focus on growth initiatives.”

Summed up Hinrichs: “We look forward to meeting the opportunities ahead in the second half of the year and over the long term as we position CSX for sustainable, profitable growth.”

In other news, CSX on July 14 reported that testing of 20% soybean oil-based fuel in a locomotive fleet serving Tampa, Fla.-based phosphate customer Mosaic, which began in 2022 to demonstrate the effectiveness of the B20 biodiesel blend in Wabtec FDL Advantage engines, “continues to yield impressive results.” Also, Canadian Pacific Kansas City on Investor Day, June 28, announced a new joint service agreement with CSX and involving Genesee & Wyoming that will create a direct CPKC-CSX interchange connection in Alabama and a corridor linking Mexico, Texas and the U.S. Southeast.

TD Cowen: “Yields Soften Despite Strong Service”

“CSX is a good company with solid fundamentals that is well positioned to benefit from long-term economic growth,” notes TD Cowen Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “The railroad kicked off earnings meeting expectations on the bottom line, though yields stepped down sequentially and volumes remained challenged. Continued weakness in the intermodal markets clouds a material 2H recovery, though signs of stabilization appear. Weakening chemicals and forest products speak to a softer macro.

“CSX reported 2Q EPS of $0.49, in line with the consensus estimate and a penny below our forecast. Yields decelerated sequentially, leading revenues to decline 3%. Adj. OR worsened 450bps y/y and missed our forecast by 100bps. It should be noted that last year’s second quarter results included a $122MM ($0.04) benefit to EPS.

“Intermodal volumes declined by 10% in the quarter as both domestic and international intermodal were under pressure. Looking forward, domestic intermodal is showing signs of stabilization and 2H should show improvement, albeit at a smaller clip—similar to our view on the truckload market. We don’t expect things to worsen in 2H, but customers appear mixed on a peak season, which has yet to be seen. International intermodal continues to reflect weak imports and de-stocking, with a lack of optimism on a real inflection in 2H, other than comps getting much easier in Q4. In 1Q, CSX was bullish on a 2H rebound per its international customers, though that did not seem to come across this quarter.

“Coal revenue decreased 2% despite a volume gain, as yields declined due to lower export benchmarks. CSX expects coal RPUs to decline mid-teens percentage sequentially, well below our previous estimate, which is attributed to benchmark pricing of $225 per metric ton. While export coal demand is expected to hold, domestic coal should soften as lower natural gas prices negatively affected demand. Management did note that a hot summer is providing a helpful tailwind early in the quarter.

“CSX continues to expect low single-digit revenue ton-mile growth for 2023. While still positive, softer yields due to suppressed rail volumes should continue to be a challenge in 2H despite fuel tailwinds. We do not expect any material uplift in rail volumes until OTR rates have show a meaningful turnaround.

“We adjust our 2023 and 2024 EPS estimates to $1.92 from $2.00 and $2.10 from $2.15, respectively. Continuing to use our 16.5x multiple (which is slightly below the Class I historical average) and our updated 2024 EPS estimates, our price target of $35 remains intact. Reiterate Market Perform. We continue to monitor rail regulation risk following our deep dive report quantifying the impacts of the salient incoming rail regulation. Reciprocal switching and safety rules are at the top of the regulatory agenda.”