Is CSX Running Out of Steam?

CSX (CSX) announced fourth quarter ended December 25, 2015 total revenue of $2.8 billion, down 13 percent year-over-year from $3.2 billion during the same period last year.

CSX declared fourth quarter of 2015 net earnings of $466 million or $0.48 per diluted share, down 5 percent year-over-year from $491 million or $0.49 per diluted share in fourth quarter of 2014.

The railroad company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment, unfavorable energy market transition and strong U.S. dollar, putting downward pressure on the company’s key margins.

Getting stagnant  

CSX earnings for fourth quarter of 2015 declined somewhat compared to the earnings during the same period last year, attributable to the weakness in global commodity demand and pricing scenario.
However, full-year performance depicted mixed results with earnings for 2015 growing slightly over last year but, top line continued to decline over the same period due to smaller fuel recovery, mix and volume greatly offsetting the pricing increases. Although, operating income for the quarter declined 12% to $791 million but, still operating ratio got better by 20 basis points to 71.6%.

The railroad operating major is focused on diversifying its consolidated $2.4 billion worth of core capital investments for the complete fiscal year 2016. The key infrastructure investments are allocated across enhancing performance and strengthening rail safety, advanced equipment investments targeted towards improving locomotive fleet and planned investments focused on enhancing productivity and supporting growth. The strategic $300 million worth of PTC investments are in line with the previous year with net cost for implementing PTC currently forecasted at $2.2 billion.

The unique strategy of CSX for enhancing year-over-year bottom line growth converges well with its controlled and diversified capital investments targeted for the complete fiscal year 2016 which is expected to drive better free cash flows for the company.

CSX is driving robust 2015 performance in spite of the globally tough market conditions with continued resource reductions, efficiency achievements and solid pricing that is supporting notable margin growth. However, coal is expected to continue to face strong market headwinds during 2016 with domestic coal volume estimated to be approximately 19 million tons per quarter and complete-year export coal volume is estimated to be nearly 20 million tons and having downside potential.

Weakness ahead

Moving ahead, EPS for 2016 is estimated to fall under the existing tough global operating conditions mainly due to weaker commodity prices and strengthening U.S. dollar which is believed to affect most markets. Despite, tough global operating conditions, CSX seems to be focused on implementing strategic pricing while achieving $200 million of key efficiency gains.

CSX has uniquely proposed the development of an Intermodal terminal for Johnston County in North Carolina at an estimated total project cost of $272 million which is expected to accelerate economic growth of the region and support to position eastern North Carolina as a key transportation logistics hub.

The global railroad operator seems focused on expanding its operations worldwide at strategic locations which is believed to somewhat offset the impact of declining company margins amid tough global commodity demand and pricing environment.

The growth outlook for global railroad industry seems extremely well-placed with the U.S economy continuing to grow and emerging strongly from the global economic slowdown, demonstrating solid demand for key rail transportation services and thus, driving significant company margins.

Conclusion

CSX has logical valuation with trailing P/E and forward P/E ratios of 11.15 and 10.72 respectively, depicting a marginally-priced stock and comparable to the industry’s average P/E of 17.04. The PEG ratio of 2.48 signifies notable company growth and comparable to the industry’s growth average of 1.76. The profit margin of 16.66% also seems satisfactory. However, CSX needs to optimize its debt-burdened balance sheet with significant total debt of $10.70 billion against weaker total cash position of $1.44 billion only, restricting the company to continue with its daily operations profitably.
Published on Feb 12, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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