One of the largest U.S. railroads, CSX Corporation (CSX), reported its first quarter 2012 earnings of 43 cents per share, surpassing the Zacks Consensus Estimate of 38 cents. The earnings increased 23% year over year from 35 cents, due to higher profits on solid pricing and fuel surcharges as well as higher volumes from Intermodal and Merchandize segments.
Revenues climbed 6% year over year to $2,966 million, backed by a modest 1% volume growth, but fell below our expectation of $2,978 million.
Operating income grew 11% year over year in the first quarter to $856 million, driven by higher revenues along with improving productivity and effective cost control. Operating ratio (defined as operating expenses as a percentage of revenue) improved 140 basis points year over year to 71.1%
Performance Across Business Lines
Merchandise revenue and volume increased 10% and 3% year over year, respectively, in the reported quarter. Metals revenue increased 15% on 8% volume growth owing to higher shipments of finished steel products like sheet steel, pipe and steel bars required in automotive and energy industries alongside higher scrap shipments. Automotive revenue upped 28% on 18% higher volume due to higher North American automotive production. Food and Consumer revenue grew 7% and the volume inched up 1% in the first quarter due to higher shipment of refrigerated products. Chemical revenue climbed 5% year over year but volumes remained flat. The growth in the fracturing sand shipment, required for natural gas drilling and higher restocking of plastic products, was largely offset by lower shipment liquefied petroleum gas due to warmer winter.
Agricultural revenue increased 6% year over year, but volumes remained lackluster and dipped 1% due lower ethanol and export grain shipments. Phosphates and Fertilizers performed poorly with a 4% decline in revenue and 3% drop in volumes due to a temporary lag in procurement as a result of anticipated lower prices in the commodity market. Housing and construction market remained dominated by the 12% revenue growth in forest products and a 6% hike in the emerging market. Volumes in forest products improved 6% year over year due to recovering construction market, but emerging markets volume declined 4% due to the completion of major construction projects, resulting in lower shipments of raw materials like rushed stone, sand and gravel.
As estimated, Coal revenues as well as volumes saw a year-over-year decrease of 5% and 14% in the first 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 19% on 9% volume growth. Domestic shipments increased due to higher rate of truck load conversion to rail freight coupled with new customer wins in transcontinental market and increase in products offerings.
Liquidity Position
The company exited the first quarter with cash and cash equivalents of $627 million, compared with $534 million in the year-ago period. Long-term debt decreased slightly to $8.6 billion from $8.7 billion reported during the year-end 2011.
Guidance
The company expects to deliver continued growth in its second-quarter earnings, despite the headwinds surrounding its utility coal volumes.
Our Analysis
CSX Corp. generated solid financial results in the first quarter primarily due to higher value of rail freight demand. The pricing improvement highlights the growing market demand for rail-based freight transportation services and higher fuel surcharges that offset higher costs and steeply rising fuel prices. 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 CSX Corp. given the declines in 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 #4 (short-term Sell recommendation) on CSX Corp. We also maintain our long-term Neutral rating on the stock.
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