Railroad company CSX (NASDAQ:CSX) in comparison to its peers Norfolk Southern (NSC) and Union Pacific (UNP) has underperformed the market in the last year with gains much lower than the peers, demonstrating solid gains. CSX shares gained just 20%, slightly below the S&P 500’s gain of 21%. Also, CSX's results missed analysts' expectations for fourth quarter 2014.
CSX’s earnings declined 5% to $426 million, but its revenue increased 5% to $3 billion, a quarter of this revenue is contributed by weakness in coal transportation, which accounts for nearly a quarter of its revenue. The shift of power plants in the U.S. from coal to natural gas resulted in 5% coal volume decline in quarter four.
The increasing operating ratio for CSX is a matter of concern. Despite strong efforts to pull down the operating ratio in the 60s, it rose from 70.6 in 2012 to 71.1 in 2013. The demand for coal shipments must become healthy by 2015 for the company to reach even the low end of its forecast for earnings as quoted by the chief financial officer Fredrick Elliason in a conference call.
- Warning! GuruFocus has detected 3 Warning Signs with CSX. Click here to check it out.
- CSX 15-Year Financial Data
- The intrinsic value of CSX
- Peter Lynch Chart of CSX
However, three important factors need to be considered by investors before investing in CSX for achieving a turnaround: first, what might fuel its growth; second, how the operations might run going forward; and finally, what are its prospects.
The First Factor: What Might Fuel Growth
The decline in coal volume by 5% was offset by the intermodal and merchandise categories, which provide strong support to the railroad company. The Intermodal demand increased 11% and merchandise demand increased 7% driven by growth in agricultural and industrial chemicals, which grew 16% and 18%, respectively. CSX’s total volume growth increased by 6% on account of the strong demand from energy and auto markets.
The Second Factor: How Operations Are Running
The comparison of the operating ratio with sales is mandatory to assess CSX’s operating efficiency. This parameter continues to bother the company as discussed earlier. CSX is continuously focused on improving its operations and reducing costs, still the operating ratio has increased from 70.6 to 71.1. Investors are unsure about CSX’s plans of achieving an operating ratio in the 60s by 2015. Hence, the management commentary regarding cost cutting is essential for Investors.
The Third Factor: Improving Performance
Going forward, CSX is focused on improving its performance. And, with the expanding economy, CSX is well positioned to leverage that environment to create sustainable long-term value for its customers and shareholders as quoted by CEO Michael Ward. The U.S producers will play a larger role in the global coal market as expected by CFO Fredrik Eliasson.
CSX is willing to give price concessions to U.S. exporters even though the declining coal demand will negatively impact short-term growth. CSX is ahead of its peers in the same industry. The Union Pacific saw a 3% increase in coke carloads, and Norfolk Southern witnessed year over year decline of 12% in comparison to CSX’s impressive performance of 22% increase. With the inventory stabilization, demand for coal is expected to return in 2014 as expected by the U.S. Energy Information Association, and CSX.
Favorable rail industry dynamics, the enhancement of CSX’s network and terminal capacity, and the recovery in the construction sector are certain catalysts working in its favor that could brighten its future. Additionally, CSX is focused on offering improved services at reasonable costs to customers in addition to improving operational efficiency.