Is CSX Going to Crash?
The railroad sector of the US economy is going through a tough time. We all know that a major reason behind this weakness in railroads is the decline in coal volumes transported by railroads. The usage of coal in power generation has been on a decline over past several months. On an annualized basis, coal consumption has reduced by 10 %, mainly due to a 10 % year-over-year fall in electric power sector consumption. A cheaper and cleaner natural gas is continuing to replace coal as a fuel for the power plants.
A second big reason is that the prices of crude oil, which have been falling since mid-2014, have fallen more than 50 % in the last one year. The implication of this is that transportation through trucks as compared to railroads has become highly economical. Now, the low prices of crude oil and natural gas are here to stay for a long period which could be safely assumed to be at least this full year. And we should also not expect the usage of coal to increase significantly in the near future unless natural gas gets expensive enough.
CSX has suffered an 18 % annualized deterioration in coal volumes. This forced the company to slash its forecast to a meagre 3 % on a year-over-year increase in 2015 earnings per share. That would be significantly down from the previous projection of a mid-single digit growth in earnings. This year, the U.S. Energy Information Administration's (EIA) projects a 0.5 % increase in coal consumption in the electric power unit in 2016 from the 2015 level. Further, the usage of liquid fuels is expected to go up by 0.8 % from 19.4 million barrels per day in 2015 to 19.6 million barrels per day in 2016. If this happens, the railroad industry and CSX shouldn’t worry as much about revenue growth as otherwise. CSX is also hoping that the intermodal transport growth will be enough to offset any negative effect of coal demand on the overall revenue.
The company continues to step up highway-to-rail conversions to gain a significant market share in the eastern region which is well-positioned for intermodal business. Some experts also believe that “Other traffic commodities, driven by Chemicals, Intermodal, Home Building and Autos have stronger longer term upside versus the transient conditions weighing on the shares.”
The company’s sales have grown at 7 % per year for the last five years on an average. Further, the earnings, as well as dividend growth, have been even more compelling for the investors to take note of. The average EPS growth was very high at 15.1 %, and the average dividend growth was also very high at 16.5 %. The company has also been beating the analysts’ estimates over the last many (six out of seven) quarters.
CSX also transports finished goods across North America and that segment is driving the revenue growth due to strong consumer demand. Low fuel prices are also a catalyst for the unhurt bottom line. In the last quarter, expenses declined 11 % on the collective effect of continued low fuel prices, cost reductions reflecting lower volume and savings from efficiency initiatives which are also reflected in the improving operating ratio.
CSX looks well positioned for continued healthy growth at this point in time when it is yet to announce results for the last completed quarter. If it could repeat its recent history of an earnings surprise for the fourth quarter too, we are in for a big upside in its stock price.