The Street Debates: Should Investors Buy The Dip In CSX?

Railroad company CSX Corporation CSX reported Tuesday with second-quarter results that were notable for a miss on the EPS and revenue lines. Here's how some of the Street's top analysts reacted.

The Analysts

RBC Capital Markets' Walter Spracklin maintained a Sector Perform rating on CSX with a price target lowered from $78 to $75.

Raymond James' Patrick Tyler Brown maintained at Outperform, price target lowered from $84 to $81.

UBS' Thomas Wadewitz maintained at Neutral, unchanged $81 price target.

RBC: Key Takeaways

CSX reported a weaker-than-expected second quarter, including an EPS miss at $1.08 versus $1.11; lower yields; and a lower operating ratio, Spracklin said in a Wednesday note.

Revenue fell 1% from the same quarter a year ago due to lower intermodal volumes and lower "other" revenue due to decreased demurrage charges, the analyst said. 

Carloads were also lower year-over-year by 4%, mostly due to decreased domestic intermodal volumes, with weakness noted in metals and equipment and fertilizer volumes, he said. 

CSX expressed a cautious view on the back half of 2019 by lowering its revenue outlook from a range of positive by a low-single digit to down 1%-2%, Spracklin said. CSX's back half could be negatively impacted by trade uncertainties and an unclear macro environment, he said. 

Related Link: CSX Lowers Revenue Outlook For 2019

Raymond James: Opportunity To Improve Operating Ratio

On top of an EPS and revenue miss, CSX also reported an EBIT miss of $1.305 billion versus expectations of $1.355 billion, Brown said in a Wednesday note.

The operating ratio did improve by 120 basis points from last year to 57.4% as the company continues to move toward its sub-60% goal in 2019, the analyst said. 

The company's OR represents a U.S. Class I record, but this is overshadowed by management's revised revenue guidance, he said. 

CSX could see more OR improvements moving forward due to greater internal efficiencies and cost-take outs, Brown said. 

The railroad's focus on creating a "more service-centric product" across the entire business will ultimately result in pricing, volume and earnings growth, according to RayJay. 

UBS: Negative Read-Through For Rivals

CSX's management expressed a cautious outlook on volume trends as part of its revenue guidance reduction, Wadewitz said in a Wednesday note.

The "clear weakness" in volume shouldn't come as a surprise, but signals a negative read-through on EPS expectations for rival domestic railroads, the analyst said. 

Norfolk Southern Corp. NSC shares the most similarities with CSX in terms of customer concentration, and Tuesday's print likely points to similar softening at Norfolk, he said.

Yet Norfolk got a head start in its PSR and operating improvement programs, so it has the potential to show better earnings growth with cost reductions despite the headwinds, according to UBS. 

Price Action

CSX shares were down 10.27% at $71.38 at the close Wednesday.

Related Link: Commentary: Understanding The Railroads' Quarterly Earnings And What Else To Ask...

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Posted In: Patrick Tyler BrownrailRailroadsRaymond JamesRBC Capital MarketsThomas WadewitzUBSWalter SpracklinAnalyst ColorEarningsNewsPrice TargetReiterationAnalyst Ratings