Leading U.S. railroad, CSX Corporation (CSX), reported second quarter 2012 earnings of 49 cents per share, surpassing the Zacks Consensus Estimate of 47 cents. The earnings figure increased 7% year over year from 46 cents buoyed by higher revenues from exports coal, intermodal and automotive.
Revenue remained flat year over year at $3,012 million but fell below the Zacks Consensus Estimate of $3,052 million.
Operating income grew 2% year over year in the second quarter to $943 million, driven improving productivity and effective cost control. Operating ratio (defined as operating expenses as a percentage of revenue) improved 60 basis points year over year to 68.7%.
Performance Across Business Lines
Merchandise revenue and volume increased 6% and 1% year over year, respectively, in the reported quarter.
Automotive revenue increased 34% on 27% higher volume attributable to 25% year-over-year growth in North American automotive production. Chemical revenue climbed 4% year over year on 1% growth in volumes driven by higher fracturing sand shipment, required for natural gas drilling and growth in crude oil shipments. Metals revenue grew 3%, but volume dipped 1% due to weaker global demand, affecting exports that clouded higher shipments of finished steel products like sheet steel, pipe and steel bars required in automotive and energy industries.
Phosphates and Fertilizers revenues increased 6%, but volumes dropped 1% to lower fertilizer shipment given the temporary lag in procurement as a result of anticipated lower prices of finished phosphate products. Food and Consumer revenue declined 3% as volume plunged 7% in the second quarter due to lower shipments of appliances that offset higher shipment of refrigerated products. Agricultural Products revenue decreased 5% year over year on 7% decline in volumes due to lower ethanol and corn volumes.
The housing and construction market remained dominated by the 6% revenue growth in forest products. Emerging market revenues remained flat year over year. Volumes in forest products improved 1% year over year due to the recovering construction market, while emerging markets volume declined 10% due to the completion of major construction projects, resulting in lower shipments of raw materials like rushed stone, sand and gravel. Further, salt shipments also declined on higher stockpile given the milder winter weather.
Coal revenues as well as volumes saw a year-over-year decrease of 14% each in the second quarter. Utility coal shipments continued to decline as a result of low natural gas prices. This decline was partially compensated by higher export demand for U.S. thermal coal in the international markets.
Intermodal revenue saw a year-over-year increase of 10% on 8% volume growth. Domestic shipments increased due to capacity growth, higher rate of truck load conversion to rail freight along with new customer wins. International business gained from new customers.
Liquidity Position
The company exited the second quarter with cash and cash equivalents of $642 million, compared with $1,252 million in the year-ago period. The long-term debt position slightly improved to $8.6 billion from $8.7 billion at year-end 2011. The company’s debt-to-equity ratio stood at 96.5% versus 103.1% at year-end 2011.
Guidance
The company continues to expect operating ratio of 65% by 2015 but also expects near-term growth to be affected by continued declines in utility coal.
Our Analysis
We expect the company to remain focused on growth with increased profitability in most of its products lines, particularly in Intermodal and Automotive. Higher profitability will further support the investments to meet the growing demand in the transportation sector. Additionally, we expect the company to focus on better pricing and fuel cost recovery.
However, we remain cautious on the stock of CSX given the declines in utility coal volumes, which constitute a significant part of its business. Further, the company’s capital intensive nature, unionized workforce, increased competition from major railroads like Norfolk Southern Corp. (NSC) as well as strict railroad regulations, keep us on the sidelines.
We have a Zacks Rank of #3 (short-term Hold recommendation) on CSX Corp. We also maintain our long-term Neutral rating on the stock.
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