Some Wonder How Cost Efficiencies At CSX Reconcile With Declining Earnings

Barclays reiterated its Overweight rating on CSX Corporation CSX after the company reported better-than-expected third quarter earnings and improved margins in a difficult volume environment.

CSX reported third quarter EPS of $0.48, above Barclays’ and consensus $0.46 and guidance for a slight decline from last quarter's $0.47. The brokerage said a flat operating ratio to the second quarter is the carrier's best third quarter sequential margin outcome in over five years, and expects further improvement could materialize should coal demand remain stable.

“While we struggle to reconcile management reported efficiency gains in a down earnings year, we are nonetheless impressed by results and encouraged for a brighter future at CSX,” analyst Brandon Oglenski wrote in a note.

“The company may not yet be structurally positioned for a low 60s OR, but we are encouraged by signs of an increasingly cost-conscious management team,” Oglenski continued.

Meanwhile, the analyst noted that CSX should not only benefit from stabilized rail volumes, but also offers material margin upside and remains the cheapest among peers.

“We suspect continued execution on costs should help narrow the valuation gap as investors look to monetize stabilizing fundamentals as well as the significant longer-term value creation opportunity,” the analyst added.

To reflect third quarter earnings, Oglenski raised his 2016 and 2017 EPS estimates each up $0.02 to $1.79 and $1.92, respectively. However, the analyst maintained his price target at $35.

At time of writing, shares of CSX rose 3.31 percent to $31.21.