On Feb 20, 2014 we issued an updated research report on CSX Corp. (CSX). While the rail industry pricing and operational improvement aided CSX’s top-line growth, the company continues to struggle with its declining Coal business which is a key revenue generator and one of the major segments.
Management aims to bring down its operating ratio in the high 60s range by 2015 and to mid-60s in the long term, aided by network efficiency, volume growth, and pricing above rail inflation. The company expects expansion in the U.S. economy with GDP and IDP growth of 2.7% and 3% respectively. As a result, it expects 90% of its business to witness favorable demand trend thus leading to a positive volume outlook for the first quarter.
CSX Corp.has delivered an average earnings surprise of 7.58% over the last four quarters. The company reported mixed financial results for the fourth quarter with the bottom line missing the Zacks Consensus Estimate but the top line surpassing the same.
CSX Corp. expects its Merchandise and Intermodal segments, which collectively represent 83% of its volume, to grow at a rate higher than the overall economy driven by superior network service. The company expects Intermodal to be the major growth driver in 2014 as it looks forward to tap an estimated 9 million truckload opportunity. In addition, Agricultural, Automotive Chemical, Forest products and Mineral shipment are also likely to register growth in the near-term given improving market fundamentals.
However, the company is skeptical about achieving 10–15% earnings per share growth over the next two years similar to 2013. Key factors that helped earnings growth in 2013 such as favorable impact of liquidated damages and real estate gains are not likely to occur at the same rate over the next two years. In addition, unfavorable market demand trend in Coal is likely to continue affecting the company’s volumes and revenues.
The company expects coal revenue declines to continue in 2014 following $295 million in coal revenue loss in 2013 and over $500 million in 2012. CSX Corp. expects export coal volume to decline in the first quarter and 2014 volume is estimated in the mid-30 million ton range. In addition, rail pricing for coal transportation will also remain low in order to help keep U.S. coal competitive globally.
In addition, competition from other railroad like Kansas City Southern (KSU), higher year-over-year expenses related to inflation and volume growth and regulatory issues are likely to restrict growth going forward.
CSX Corp. currently carries a Zacks Rank #4 (Sell).
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