Is CSX Worth Buying?CSX) reported its 4th quarter 2015 results on 12th January 2016. The company reported a 13 % year-over-year decline in revenue as pricing gains were more than offset by the impact of lower fuel recovery. A 6 % volume decline and continued transition in the company’s business mix were also the primary reasons behind the lower revenue. The company successfully reduced its expenditure by 13 % primarily due to reduced fuel prices, lower volume-related costs and efficiency gains. The positive impact of reduced expenses was a 20 basis point improvement in the operating ratio 71.6 %.
The company’s net earnings were $ 466 million, 5 % down from $ 491 million of the fourth quarter 2014.
The full year performance of the company was also impressive considering the challenges in the energy market, low commodity prices and a strong U.S. dollar that impacted many of our markets. In fact, CSX’s performance has been strong over the past five years as it has transformed its business to continue delivering solid results despite the global energy transition. The revenue from coal has rapidly declined over these five years. CSX’s coal revenue declined from $ 3.7 billion to $ 2.3 billion, a cumulative reduction of $ 1.4 billion. The company has been investing in long-term growth opportunities while reducing the weightage of coal in its portfolio. As a result, in 2015, coal represented only 19 % of CSX’s revenue, down from more than 30 % in 2011.
On the other hand there was good growth in intermodal, automotive and minerals that partially offset the continued declines in coal. CSX has significantly diversified its market mix at the same time and this has helped offset the losses in coal revenue. Also, the company has been improving its service quality and aligning resources and costs against the lower demand environment to achieve efficiency gains of more than $ 180 million. These efforts helped generate an operating income of nearly $ 3.6 billion and also achieve its first sub-70 full-year operating ratio at 69.7 %. From the shareholder’s point of view, a very significant feat achieved was an EPS of $ 2 per share for full year 2015, reflecting slow but steady growth over the past five years.
Why did coal volumes reduce?
Low natural gas prices coupled with the impact of significant flooding in South Carolina impacted domestic coal volumes. On the other hand, low commodity prices and the strong U.S. dollar challenged export of coal in many of CSX’s merchandise markets. Also, in order to drive further efficiency, the company closed two facilities in its coal network. These actions taken in order to adjust to the lower demand in the coal market will drive future benefits as the company gains greater workforce flexibility.
This year is expected to be tough for railroad companies. The freight environment continues to have pronounced challenges with low commodity prices, low natural gas and a strong U.S. dollar. U.S. coal exports have gone down over the last few years and will probably continue for as long as the dollar remains strong. Hence the coal volumes are expected to decline further at least in the first quarter. However, the automotive segment is expected to grow consistent with light vehicle production. Last year, the auto network experienced certain weather and service related congestion. Since these problems are absent this year, the auto segment will remain favorable.
Other than auto, the intermodal segment has a great potential for the long term. Certain upcoming trends place the intermodal unit in a very good position for the company’s future. Even in the rough environment, the revenue from intermodal grew 4 % in the last quarter which is indicative of its potential. And after the completion of the Gateway Project and the Panama Canal expansion, this segment will get a certain boost to CSX’s operational efficiency and hence earnings.
Most other segments including agricultural products, chemicals and metals are not expected to help CSX much against the revenue decline that coal is going to cause.
CSX has been consistently doing well over the last 5 years. But the US economy has been suffering in the more recent times. The recovery has been shaky and slow. And the commodity environment has also not been favorable. Thus it is clear that this first quarter too CSX stock will find it hard to turn around. We must expect some more downside in the near future. Therefore, the best time to invest in CSX is certainly not now. Of course for the long term, CSX will keep posting strong numbers quarter after quarter with certain efficiency-boosting developments underway.
Published on Feb 10, 2016By Vinay Singh