UPDATED: CSX net soars on improved revenue

Written by Stuart Chirls, Senior Editor
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CSX Corp. reported second quarter 2018 net earnings of $877 million, or $1.01 per share, versus $510 million, or $0.55 per share in the same period a year ago.

The railroad’s operating ratio set an all-time company quarterly record of 58.6% from 67.4% in the prior year or 63.5 % on an adjusted basis, excluding restructuring charges. Compared to 2017 second quarter, the adjusted operating results represent an operating ratio improvement of 490 basis points and a 58% in earnings per share.

“I could not be more proud of our hardworking CSX employees for achieving these record-setting results,” said James M. Foote, president and chief executive officer. “I expect continued improvement in our safety, service and financial performance. “While we remain in the early stages of the transformation I am more confident this exceptional team can deliver on our longer term outlook.”

Revenue for the second quarter increased 6% over the prior year to $3.10 billion, while expenses declined 8% on-year or 2% when excluding prior year restructuring charges.

Operating income for the quarter increased 34% to $1.28 billion when compared to $957 million in the same period in 2017or 20% when compared to the adjusted operating income of $1.07 billion a year ago.

“CSX notched another strong performance in its comeback story, with 2Q18 results handily beating our and consensus estimates,” said Cowen and Co. Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, following the company’s call with analysts. “The company took advantage of a strong pricing environment and continued growth in high margin coal export to take a step closer to their goal of a sub-60% annual operating ratio.

“CSX reported EPS of $1.01 vs. our $0.88 forecast and consensus’ $0.87 expectation. CSX reported revenue of $3.1 billion, up 6% y/y and ahead of our $3.02 billion estimate, as well as consensus’. CSX posted an impressive operating ratio of 58.6%, outpacing both our and consensus estimates. The quarter was driven by good pricing, strong gains in high margin export coal volumes, lower headcount, and better productivity.

“Although they stopped giving pricing details late last year, management indicated that the market remained strong with both y/y and sequential gains for pricing. We believe results for core pricing to be well above rail cost inflation for the eastern giant and consistent with what we saw from our recent 2Q Railroad Shipper Survey that saw expectations jump 90 bps on a sequential basis. The quarter also benefited from a better mix of traffic, as high yielding export coal continued to grow at a rapid pace.

“Management noted that it does not see export coal growth slowing anytime soon and noted that it could see 40+ million tons shipped this year (well above their previous guidance of 30 million tons). These trends enabled the company to increase its annual revenue outlook from up modestly to up mid-single digits. We believe this is very achievable, especially given the growing pricing strength of their truck competitive business, mainly intermodal and some merchandise traffic.

“We are starting to see the effects of some of the changes that CSX’s new management team has put in place, as well as see the pathway for the rest their goals to be fulfilled. CSX previously consolidated its structure into four operating regions from nine and cut the number of hump yards to four, from 12. Management rolled out a new demurrage policy that continues to benefit the company as shippers have yet to change their habits to avoid the fees (we see this eventually happening but likely not soon). Their goal of achieving 60% OR now seems more attainable, although management cautioned that 2Q was somewhat unique with strong seasonality boosting results. Weather and labor expenses are likely to be bigger headwinds in the back half of the year, according to management.

“CSX continues to progress on its plan to sell at least $300 million worth of real estate between now and 2020. This quarter it sold $37 million of real estate, including two lines a few weeks ago to OmniTRAX. The previous six lines put up for sale should be sold in the back half of the year, and CSX likely has more coming to market before the year is out. This should aid the railroad’s already strong operational free cash flow generation. We continue to see share repurchases as their number one use of cash this year (we note that he company bought back just under $1 billion of its stock in 2Q alone, $450 million of which was done via an accelerated share repurchase program in late April.

“CSX’s exposure to the recently announced tariffs, and potential future tariffs, doesn’t seem like it will be much of an issue. The company actually has seen positive results from U.S. steel manufacturers picking up production. In terms of other exposure, CSX’s grain export business is around $30 million, with soybeans accounting for about one-third of this. CSX wouldn’t be impacted by tariffs on imported autos from Mexico, but would be impacted by auto import tariffs with Canada, and is waiting to hear if anything happens regarding this.

“We are now expecting a 2018 OR of 60.3%, just slightly above the company’s sub-60% target, and we expect CSX to beat this goal in 2019. We raised our 2018 EPS estimate to $3.70 from $3.35 to account for the big 2Q beat, upwardly revised export coal outlook and confidence in CSX’s ability to execute on their plan. Our 2019 estimate is now $4.00, up from $3.60 prior. We are adjusting our multiple down to 18.5 as we believe the company will be closer to operational normalcy then. We also note that 18.5x is still above CSX’s 3-, 5-, and 10-year historical average forward multiple. The slight premium above those historical trends is warranted, in our opinion, given the successful execution this management team has been able to produce. Accordingly, our new price target is $74. While our Market Perform rating remains unchanged we would not be opposed to reexamining our rating if the shares were to pull back.

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