CSX Chugging Right Along

CSX Corp. CSX reported earnings last night that were exceptionally strong, as the Jacksonville, Fla.-based company showed that they have pricing power in every segment of its business. The company reported second quarter earnings of 46 cents per share on $3.0 billion. Wall Street had been expecting earnings of 44 cents per share on $2.98 billion. Intermodal activity and the export coal traffic continue to help drive CSX earnings, though overall coal volume fell on weaker utility demand here in the U.S. CSX said it expects weakness in the housing and construction markets to continue. CSX said that as the economy continues to recover, shipping volumes were rising, especially in the coal market, where coal is showing incredible strength. CEO Michael Ward said, “[W]e're really seeing a great, robust growth in the export coal business. Last year we shipped 30 million tons of export coal; this year we're expecting to be in the range of 42 to 45 million.” CEO Michael Ward said on CNBC that he was "not overly concerned" about the economy. “We're not overly concerned about where the economy's heading,” Ward said. “We continue to see a gradual increase in shipments, and we feel good about that.” To take advantage of the strong growth in coal useage, CSX is is going to spend an additional $200 million on railcars to take advantage of the strong growth overseas for coal. The company plans to spend $2.2 billion this year in capital expenditures. “In the markets we serve we continue to see positive trends," he said. “We saw growth across most of our markets this (second) quarter, and expect that — positive trends — to continue in the second half.” Ward pointed at the Institute for Supply Management's latest reading of above 55, “which indicates growth is expected.” He said there could be the potential for restocking, as factory inventory levels are lower than customers would like. After the three for one split, shares are trading around $25 per share, and more important are trading at 12.5 times forward earnings, which is exceptionally reasonable for a company growing revenues net profit 22% year-over-year. Shares also sport a 1.9% dividend yield. ACTION ITEMS:

Bullish:
Traders who believe that the railroads are likely to continue showing strong results might want to consider the following trades:

• Consider going long names like Norfolk Southern NSC, Union Pacific UNP, and Canadian Pacific CP as the railroads generally all perform about the same.

• Another derivative play off the boom in railroads is Berkshire Hathaway BRK, which owns Burlington Northern Santa Fe, after Warren Buffett spent $40 billion on the railroad a few years ago.

Bearish:
Traders who believe that the economy is going to slow considerably in the second half may consider alternate positions:

• If the economy slows down drastically, despite what CSX's CEO said, traders may want to short the rails, especially if the debt ceiling deal does not get done.

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