For CSX, a Difficult Third Quarter (UPDATED)

CSX, the fourth Class I railroad to report third-quarter 2020 earnings, continued to feel the impact of the COVID-19 pandemic and authorized an additional $5 billion share buyback. CSX’s 3Q2020 net earnings of $736 million, or $0.96 per share, fell 14% from the 2019 period’s $856 million, or $1.08 per share.

Revenue for 3Q20 decreased 11% over the prior year to $2.65 billion “as intermodal volume growth was more than offset by declines in coal and merchandise volumes as well as lower fuel surcharge revenue,” CSX said. Expenses decreased 11% year over year to $1.51 billion, driven by “continued efficiency gains and volume-related reductions.” Operating income declined 11% for the quarter to $1.14 billion, compared with $1.29 billion in the same period last year. CSX’s operating ratio of 56.9% remained in line with the prior year’s record results.

In 3Q20, the railroad reported that train velocity decreased by 3% and car dwell increased 9% relative to the prior year period. In addition, CSX said it “remains focused on executing the operating plan to deliver improved reliability, faster transit times and increased asset utilization while continuing to control costs.”

CSX also announced a new share repurchase program, providing $5 billion of incremental authority to the approximately $1.1 billion remaining under the existing share repurchase program, affirming “CSX’s commitment to continued return of capital to shareholders.”

“I am incredibly proud of how CSX’s exceptional team of railroaders continues to deliver against the challenges this year has presented,” President and CEO James M. Foote said. “Their hard work allowed CSX to efficiently absorb the record rebound in volume while maintaining high levels of customer service.”

CSX’s Investor Relations page provides more details.

Cowen Insight: ‘Favorable Trends and a Larger Buyback’

“CSX beat street EPS estimates, keeping costs off their network as business returned post-pandemic,” said Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “Trends in coal are showing some slight improvements while Intermodal continues to show strength. [Management] announced a new, larger buyback, with their balance sheet strength in focus on the call. We fine-tune our model and roll our estimates forward to 2022, moving our PT to $84.”

Cowen’s Key Takeaways:

• “CSX reported EPS of $0.96, below our $1.04 estimate but above the Street’s $0.93 expectation. Operating income of ~$1.141 bn was also below our $1.217 bn estimate and above the Street’s $1.097 bn expectation. Revenue of $2.648 bn was below our $2.724 bn estimate and slightly below the Street’s $2.670 bn. The operating ratio (OR) of 56.9% was just ~10bps worse y/y, ~160bps worse than our estimate, and ~200bps better than the Street’s. Relative to consensus, revenue in CSX’s Merchandise business and ‘Other Revenue’ category missed, while Coal and Intermodal were roughly in line.
• “A new share repurchase program was announced in conjunction with the earnings release. The new program provides CSX with the authorization to purchase $5 bn of shares, incremental to the roughly $1.1 bn remaining on their existing repurchase plan. A timeframe for completion of the new program was not given. We also highlight CSX’s balance sheet, which had $2.9 bn of cash at the end of 3Q.
• “CSX continues to operate with a lower asset base even as volumes recover. With volumes positive in the low-single-digit range in recent weeks, relative to prior to the pandemic, active T&E employees remains down over 5%, active locomotives are down 8%, and train starts are down over 10%. This is a testament to how well the company has adapted to the PSR model.
• “Coal has been hurt on a number of levels this year, further hurt by COVID-19 and lower consumption. On the Met Coal side, pricing has been challenged, while on the Thermal Coal side, it has been more of a volume story. CSX has lost Europe as a thermal coal market; India’s high rate of COVID-19 infections had a negative effect on coal usage there. Entering the year, [management] expected low 30s million tons of export coal for 2020; at this juncture [management] now expects 30MM tons for the year.
• “We are adjusting our 2020 and 2021 EPS estimates to $3.64 and $4.40 from $3.75 and $4.35, respectively. We also roll our model forward to 2022, establishing an initial 2022 EPS estimate of $4.80. Using a 17.5x multiple (down a turn as we go to 2022) and our 2022 EPS estimate, we arrive at our new price target of $84, up from $80, and we leave our Market Perform rating intact.”

Jim Blaze Comments

Railway Age Contributing Editor Jim Blaze had this to say about the CSX 3Q20 report:

“Here is my view of the data in three slides [below].”

“Since the first quarter of 2020, CSX has made choices. Financial-focused choices were made under their PSR model [that] benefitted shareholders, but not as much their customers. The PSR model under CSX stewardship is having trouble adjusting to the lower available key assets when it comes time to deliver the promised shipper PSR benefits, versus in the first quarter. I like the fact that they showed their scorecard in a balanced way—even though the shipper benefits declined. So, what do they have to do to correct the shipper side of their model?”

“[The chart below] is my early call for the Class I railroads to start using the quarterly report meetings as a place to show how customer service benefits are being delivered.”