CSX 1Q2020: Record OR; PSR Changes “Seem to be Paying Off”

CSX’s first-quarter 2020 operating ratio set a Class I railroad first-quarter record of 58.7%, improving 80 basis points from 59.5% in the prior year. The railroad achieved this milestone in the face of a drop in revenues, with a corresponding drop in expenses. CSX withdrew its guidance for the remainder of the year.

CSX net earnings were $770 million, or $1.00 per share, vs. $834 million, or $1.02 per share, in the same period last year. Revenue for the first quarter decreased 5% over the prior year to $2.86 billion, as growth in merchandise revenue was more than offset by declines in coal and other revenue. Expenses decreased 7% year-over-year to $1.68 billion, driven by “continued efficiency gains,” among them a 10% decline in labor and fringe benefits and an 18% decline in fuel costs. Operating income declined 3% for the quarter to $1.18 billion, compared to $1.22 billion in the same period last year.

“I am extremely proud of our outstanding CSX employees for keeping the railroad running at such a high level during these unprecedented times, and enabling the delivery of critical goods across the country,” said President and CEO James M. Foote. “Their hard work and dedication over the past few weeks, and throughout our transformation, have put CSX on the strongest footing it has ever been heading into this period of economic uncertainty.”

COWEN INSIGHT

“CSX registered an industry record 1Q2020 OR that pushed an EPS beat with revenues roughly in line,” notes Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Guidance was pulled, and volumes will likely be light amid the COVID-19 pandemic and uncertain macroeconomic environment, but operational changes from PSR (Precision Scheduled Railroading) seem to be paying off. We are lowering our price target and reiterating our Market Perform rating.

CSX’s reported EPS of $1.00 was above Cowen’s and the Street’s $0.92 and $0.94 estimates, respectively. Operating income of ~$1.18 billion was above Cowen’s $1.12 billion estimate and the Street’s $1.14 billion. Revenue of $2.86 billion was slightly below Cowen’s and the Street’s $2.90 billion and $2.87 billion, respectively. The OR of 58.7% was ~270 bps better than Cowen’s estimate, and ~170 bps better than the Street’s. The top line miss relative to consensus was in each of CSX’s coal, intermodal, and “other revenue” categories, with merchandise exceeding expactations.

In 4Q2019, CSX’s FY 2020 guidance “came in below expectations, with weakness in CSX’s coal franchise—the result of lower export demand and benchmark prices as well as low natural gas prices—the primary culprit,” Seidl says. “Of course, that was prior to the COVID-19 pandemic. Today, weakness in coal is clearly behind COVID-19 in the pecking order of near-term concerns. This quarter, CSX pulled guidance, as have most other companies across transports and other industries. We believe this to be a prudent move by management and one that did not catch anyone by surprise.

“We noted in commentary to our 1Q20 Rail Shipper Survey that the railroads implementing PSR should be able to better offset the volume declines that they have faced in the past year or so, declines that have only accelerated with the onset of the pandemic. Though prior survey work that we conducted has highlighted how shippers weren’t always pleased with CSX’s PSR implementation in 2017 and 2018, the operating plan is undoubtedly paying off, with this quarter’s OR a Class I first-quarter record.

“We are adjusting our 2020 and 2021 EPS estimates for CSX to $3.65 and $4.10 from $3.80 and $4.25, respectively, to account for the pandemic and other model adjustments. Continuing to use a 16.5x multiple and our new 2021 EPS estimate, we arrive at our new price target of $68, down from $70. We leave our Market Perform rating intact at this time but remain impressed with the company’s start to a difficult year. CSX is a good company with solid fundamentals that is well-positioned to benefit from long-term economic growth. However, we would remain on the sidelines due to less-than-compelling valuation and transitory customer disruptions associated with the new leadership. The shares may be attractive to patient, long-term investors.”