CSX Beats on Strong Volume - Analyst Blog

CSX Corporation (CSX), the second-largest U.S. railroad company, reported its fourth quarter earnings of $1.14 per share surpassing the Zacks Consensus Estimate of $1.10 and the year-ago earnings of 77 cents. Despite the increase in fuel price, earnings per share shot up 48% year over year on strong automotive shipments and cost-control measures.  

In fiscal 2010, earnings expanded 40% year over year to a record $4.06 per share driven by the strength in volume, revenue, productivity and operating leverage.

Revenue climbed 21% year over year to $2.82 billion in the fourth quarter, and surpassed the Zacks Consensus Estimate of $2.67 billion on volume growth. Improved volumes were largely driven by sustained economic growth across all major markets. Overall volume rose 13% year over year. Automotive and Intermodal markets saw the largest increase in volume. For the full year, revenue was $10.6 billion, up 18% year over year.

Operating income leaped 46% and 35% year over year in the fourth quarter and full-year 2010, respectively. Operating ratio (defined as operating expenses as a percentage of revenue) improved a respective 500 and 380 basis points year over year to 70% and 71.1% in the fourth quarter and 2010.

Performance Across Business Lines

Merchandise revenue and volume increased 19% and 11% year over year, respectively, in the reported quarter. Growth in North American light vehicle production, driven by higher sales, led to a 23% increment in automotive volume. Metals volume increased 15% attributable to strong shipments of sheet steel for auto production and higher scrap steel.

Chemicals and Forest Products show a substantial increase of 13%. Chemical growth was driven by healthy demand for intermediate products used in manufacturing automobiles and consumer goods, and Forest Products grew on strong shipments of pulp board and paper despite the weakness in construction related markets.

Coal revenue showed the largest year-over-year increase of 34% in the fourth quarter with volume growth of 12% attributable to higher export shipments on a surge in demand for U.S. metallurgical coal and high utility shipments.

Revenue in the Intermodal segment saw a modest year-over-year increase of 5% on 17% volume growth. The strengthening of the U.S. economy and new international gains as a result of the intermodal portfolio of service and network offerings led to the increase in volume.

Liquidity Position

The company exited fiscal 2010 with cash and short-term investments of $1.3 billion, up from $1.1 billion in the prior year. Long-term debt inched up to $8.0 billion from $7.9 billion in 2009.

CSX Corp. invested $1.8 in full-year 2010 compared with $1.4 billion in 2009. The company repurchased $1.5 billion worth of shares in 2010 and expects to repurchase about $300 million worth of shares in the first quarter of 2011 to complete its current $3 billion repurchase program.

Guidance

CSX Corp. expects to generate record financial results in fiscal 2011 with operating ratio in the high-60s. This expectation is in line with the company's previously committed goal of achieving a 65% operating ratio over the long term.

In addition, the company plans to invest about $1.8 billion in fiscal 2011. Approximately two-thirds will be invested in the company's infrastructure and rolling stock, and the remaining will be split between strategic and regulatory investments.

Our Analysis

We expect improving economic fundamentals, continued operating leverage, cost-control measures, productivity improvement and increased volume growth to fuel earnings growth and enhance operating ratio in future. In addition, the company's strong and cash-rich balance sheet along with shareholder return makes it attractive for long-term investment.

However, we remain cautious on the stock due to the company's capital intensive nature, increased competition, unionized workforce as well as increased railroad regulation. The company's primary rail competitor is Norfolk Southern Corp. (NSC), which operates mostly across the length and breath of CSX Corp.'s territory.

Consequently, we are currently maintaining our long-term Neutral recommendation on the stock supported by the Zacks #3 Rank (Hold).

 
CSX CORP (CSX): Free Stock Analysis Report
 
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
 
Zacks Investment Research