CSX Corporation (CSX), the second-largest U.S. railroad, reported its third quarter earnings of $1.08 per share, which was well above the Zacks Consensus Estimate of $1.04 and the year-ago earnings of 73 cents. Earnings per share shot up 48% year over year on strong shipment.
Revenues increased 16% year over year to $2.67 billion in the second quarter, and surpassed the Zacks Consensus Estimate of $2.65 billion. Volume grew across all major markets driven by sustained economic growth across all major markets. Overall volume rose 10% year over year. Automotive and Intermodal markets saw the largest increase in volume.
Operating income leaped 39% year over year on strong revenue growth and continued operating leverage. Operating ratio (defined as operating expenses as a percentage of revenue) improved 490 basis points year over year to 69.1% compared with 74% in the year-ago quarter.
Performance Across Business Lines
Merchandis evolume increased 7% year over year. Growth in North American light vehicle production, driven by higher sales, led to 44% increment in automotive volume. Chemical volume increased 5% driven by higher demand for products used in manufacturing automobiles and consumer goods. Strong shipment of sheet steel for auto production led to 4% growth in Metal volume.
Coal volume saw a modest 3% year over year increase attributable to higher export shipments on greater demand for U.S. metallurgical coal, which was partially offset by lower utility shipments.
Volume increased 19% in the Intermodal segment as more companies shipped goods by rail. International volume improved attributable to new business, inventory restocking by U.S. customers and early holiday shipping.
We expect other companies in the railroad sector to benefit from sustained economic recovery after a long drought. The company’s competitors — Union Pacific Corp. (UNP), Norfolk Southern Corp. (NSC), and Canadian National Railway Co. (CNI) — are scheduled to report earnings on October 21, October 27 and October 26, respectively.
Capital Spending, Share Repurchases and Dividend
CSX Corp. raised its capital investment to $1.8 billion from $1.7 billion for 2010. The company also plans to repurchase an additional $646 million in shares by the end of first quarter 2011.
Recently, the company announced an 8% increase in its quarterly dividend from 24 cents to 26 cents per share, equating to annual dividend of $1.04 per share. The increased dividend is payable on December 15, to stockholders of record as on November 30. This marks the eighth increase in five years.
Our Analysis
We anticipate that CSX Corp. will benefit from improved railroad fundamentals, increased coal demand, better pricing environment, cost-controls measures and productivity improvements. In addition, the company’s strong and cash-rich balance sheet along with shareholder return makes it attractive for long-term investment. However, increased railroad regulation, new railroad pricing, highly unionized labor and significant competition may limit the company’s upside potential.
Hence, we are currently maintaining our long-term Neutral recommendation on the stock supported by the Zacks #3 (Hold) Rank.
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