CSX: Buy Despite Weakness

CSX (CSX) announced second quarter ended June 30, 2016 total revenue of $2.704 billion, up 3.3 percent sequentially from 2.618 billion in first quarter of 2016 but, down 12 percent year-over-year from $3.064 billion in second quarter of 2015.

CSX declared second quarter of 2016 net earnings of $445 million or $0.47 per share, down 20 percent year-over-year from $553 million or $0.56 per share during the same period last year.

The global railroad company reported continued year-over-year decline in both its top and bottom lines primarily driven by the a total 9 percent decline in overall volume that poorly affected every market that comprises of over 30 percent fall in coal volumes and greatly offset the pricing improvements from strategic service product gains.

What gives?     

The top line growth for CSX suffered year-over-year mainly due to weaker fuel recovery and volumes coupled with a poor mix that greatly offset the key pricing improvements.
However, the core operational performance includes robust improvements in efficiency and services coupled with solid safety results. The core operating ratio grew by about 210 basis points to 68.9%.

Going forward, the company has provided a favorable growth outlook for third quarter of 2016 for automotive and mineral markets. The automotive market expansion is primarily driven by a robust production of light vehicles in North America. Further, the minerals segment growth is estimated to be propelled by a significant strength in the construction business and rising customer traction for the company’s innovative fly ash business.

However, CSX has an unfavorable growth outlook for several of its key business segments including, agricultural products impacted by the strengthening US dollar and weaker commodity prices, chemicals impacted by ongoing weakness in global crude oil prices and general energy prices. Domestic coal is impacted by greater inventory levels minimizing burns and weaker natural gas pricing worldwide, export coal impacted by ongoing international market oversupply and the strengthening US dollar.

The railroad transportation company is believed to continue to suffer increasing losses from the continuing weaker global commodity demand and pricing environment with unfavorable growth outlook for a majority of the key commodities greatly offsetting the favorable growth expectation for certain other commodities.

A look at the end-market

The second quarter financial results for CSX Corp. indicate tough freight conditions with robust pricing, efficiency improvements, resource minimizations somewhat offsetting a notable fall in commodity volumes. At present, 2016 core capital investments are estimated to be approximately $2.7 billion, primarily driven by fast payment of key buying commitment for locomotives and strategic improvement in major investment levels to start delivering nearly 16% to 17% of consolidated top line growth during 2017.

However, strategic coal and poor macroeconomic conditions are estimated to continue during 2016 with strengthening US dollar and weaker commodity prices impacting several markets. In addition, combined coal tonnage for complete year 2016 is estimated to fall approximately 25%. Further, third quarter of 2016 volume is expected to decline in mid-to-high single digits.

The key investments across transport infrastructure are estimated to grow at an average yearly growth rate of approximately 5% globally over the period ranging from 2014 till 2025 with the sub-Saharan African region leading the group with the greatest average yearly growth rate exceeding 11%. Investments in Canada and the US are believed to expand at an average of about 3% per year in the forthcoming decade. Also, road infrastructure spending in Latin America is projected to grow at an average of 11% per year from 2014 till 2025 with increasing level of wealth in the country that is estimated to drive robust expansions for car ownership.

Hence, despite continuing tough global commodity demand and pricing environment, CSX is believed to deliver sustainable long-term growth driven by huge upcoming growth opportunities across the globe with expanding population and rising income levels, encouraging people to own multiple cars.

Conclusion

Overall, the investors are advised to “Hold” their position in CSX Corp. considering the company’s significant long-term growth prospects with a slow but consistently improving global commodity demand and pricing environment expected to improve key company margins.
Published on Jul 27, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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