CSX Corp. Beats Q1 Earnings Ests, Falls Y-o-Y - Analyst Blog

Despite significant disruptions due to a severe winter, CSX Corporation's CSX first quarter 2014 earnings of 40 cents surpassed the Zacks Consensus Estimate of 38 cents. However, earnings fell 11% from 45 cents earned in the year-ago quarter.

The company's first quarter revenues of $3,012 million were ahead of the Zacks Consensus Estimate of $2,989 million and up 2% year over year on the strength seen in Merchandise and Intermodal that mitigated Coal revenue declines.

First quarter operating income fell 16% year over year to $739 million, resulting in 520 basis points (bps) higher operating ratio (defined as operating expenses as a percentage of revenues) of 75.5%, owing to difficult weather conditions. Operating expense increased 9% year over year to $2,273 million.

Performance Across Business Lines

Merchandise revenues grew 4% year over year to $1,787 million in the reported quarter driven by a 2% expansion each in volume and revenue per unit (RPU). Volume growth was supported by Agricultural Products (up 12%) and chemicals (up 12%), partially offset by Automotive (down 7%) and Minerals (down 5%).

Coal revenues were down 9% year over year to $662 million on 1% volume decline and an 8% RPU decline. The poor performance by Coal was mainly due to lower shipment of export coal owing to volatile global market conditions. However, the domestic market scenario improved due to strength in utility coal market and higher demand from Northern utility given colder winter weather.

Intermodal revenues rose 4% year over year to $421 million driven by highway-to-rail conversions in the domestic market, increase in service lanes and customer addition. International intermodal business also performed well on continuous strength in existing customers and increased global container shipment transportation to inland routes. On a year-over-year basis, volumes increased 5% while ARPU declined 1%.

Other revenues were $142 million, up 22% year over year.

Liquidity Position

The company exited the first quarter with cash and cash equivalents of $475 million compared with $592 million at the end of 2013. Long-term debt decreased to $9,021 million from $9,022 million at the end of 2013.

Dividend

The company's board of directors approved a 7% dividend hike, bringing the quarterly dividend payment to 16 cents per share. The increased dividend will be paid on Jun 13, 2014, to shareholders of the record on May 28.

Guidance

While, CSX Corp. expects modest earnings growth in 2014, it is confident of retaining double-digit earnings and margin expansion in 2015 and beyond. Further, the company maintains its long-term operating ratio target in the mid 60s range.

Our Take

We believe CSX has a number of profit generating factors that include favorable rail industry pricing, recovery of the construction sector, ongoing truck to rail conversion as well as expansion of network and terminal capacity. Additionally, the company's focus on operational improvement will likely drive profitability.

However, a subdued coal business that is resulting in declining domestic coal volumes as well as regulatory and competition from other railroads like Norfolk Southern Corporation NSC could hurt the company's performance in the near term.

CSX currently carries a Zacks Ranks #3 (Hold).

Other Stock

Other major railroad carriers expected to report first quarter earnings this week include Kansas City Southern KSU and Union Pacific Corporation UNP. Currently, Kansas City Southern has a Zacks Consensus Estimate of 98 cents, while Union Pacific's Zacks Consensus Estimate is pegged at $2.38 per share.