Give Credit Where It's Due: CSX Made Improvements Despite 'Noisy Quarter'

Shares of CSX Corporation CSX were under heavy selling pressure Wednesday despite the company handily beating estimates in its second-quarter earnings report.

The railroad company earned 64 cents per share in the second quarter on revenue of $2.933 billion; analysts were expecting the company to earn 59 cents per share on revenue of $2.85 billion. At the same time, management cautioned investors it will be evaluating its cash deployment strategy including shareholder distributions even though it announced a $500 million increase to its share buyback program to $1.5 billion.

CSX was "aggressive" with its buyback activity during the second quarter, which illustrates management's faith its outlook, according to UBS analyst Thomas Wadewitz. Moreover, the company kept its 2017 guidance of 25 percent earnings per share growth unchanged which reaffirmed the company's status as a "high expectations name."

CSX also showed impressive improvements throughout April and May on several operating metrics, including terminal dwell time and train speed, the analyst added. However, the improvements were short lasted and paused in June where dwell times rose significantly and it's now unclear how quickly the company will get back on track but a return to progress in rail network operation could come as soon as the third quarter.

"We continue to believe that CSX's rail network improvement program and margin expansion potential support attractive potential EPS growth and upside for the stock," Wadewitz concluded.

Wadewitz maintains a Buy rating on CSX's stock with an unchanged $63 price target.

Citi: Proper Credit Due

Citi's Christian Wetherbee commented in a brief report that CSX deserves "proper credit" for the many improvements management demonstrated during the quarter. For instance, core expenses, while $60 million higher than expected on an RTM basis, is down 50 basis year-over-year and includes a $28 million year-over-year increase in incentive comps.

Core OR was 66 percent in the quarter, which represents a nearly 300 basis point improvement from a year ago although it did fall short of the 64.8 percent the analyst was expecting.

"We think this speaks to the core operating improvement on which investors are rightly focused," the analyst stated.

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