CSX Corporation (CSX, Financial) is slated to report its first-quarter results on April 14, 2015 and experts are looking at the possibility of a mixed bag. The company is among the leading providers of railroad transportation in the U.S., and its results could broadly influence other railroad businesses such as Union Pacific Corporation (UNP, Financial), Norfolk Southern Corporation (NSC, Financial) and the privately held Burlington Northern Santa Fe LLC.
CSX saw revenues growing 5% year-over-year to $3,192 million during the fourth quarter of fiscal 2014 on the back of broad-based strength across most of the company’s markets. While the company logged operating income of $901 million for the quarter, up 11% year over year, operating ratios also expanded 140 basis points to 71.8%. Consequently, CSX reported EPS of $0.49 a share for Q4 2014, up 17% from earnings of $0.42 a share in the year-ago quarter. CSX also reported modest growth in revenues for the full fiscal 2014 to $12.67 billion from the previous fiscal’s $12.0 billion, while earnings grew from $1.83 a share in FY2013 to $1.92 a share on the back of improved margins.
Following the results, CSX also announced a favorable outlook for Q1 2015, projecting strong demand in a major portion of its markets, although the management said it expected reduced demand in the coal segment. The company, which said it would target $2.5 billion worth of capital investment in fiscal 2015, primarily for infrastructure development, also projected double-digit growth in EPS for the fiscal. Shares of CSX are currently up 1.3% since its last earnings report.
Weakness in coal, shale likely to be offset by higher margins
CSX, which is an integral part of the U.S. economy, has been witnessing a consistent upward trend in the recent years. The company’s significant intermodal businesses as well as its strong merchandise have helped push revenues up 19% in the last five years, while earnings have performed even better with a 23.7% jump during the same period, on the back of enhanced margins, to $1.93 billion in fiscal 2014.
With coal currently accounting for 22% of CSX’s sales, the negative headwinds of the slowdown in the coal industry owing to falling natural gas prices is also expected to impact CSX. The railroad operator saw a drop of nearly 15.5% in its coal-related revenues between 2010 and 2014. However, despite this trend, CSX has seen its top line growing significantly during the same period, owing primarily to its focused transition away from coal. Similarly, although CSX is likely to see a decline in its fracturing sand and other shale-related revenues owing to a nearly 46% drop in rotary rig counts in the U.S. in the last six months, the downturn is not expected to have a major impact on the company’s overall results. This is mainly because shale-related volume accounted for just 2.3% of the company’s total carload in the previous fiscal.
Another factor that could turn results in CSX’s favor is the reduction in its share count that has already seen a 13.2% drop over the last five years owing to the company’s share repurchase program. Consequently, experts are expecting CSX to report earnings of at least $0.45 a share, up 15% from $0.40 a share in the prior-year quarter, although revenue growth is likely to be mediocre at $3.06 billion, up 1.7% year over year.
Final thoughts
CSX has been consistently posting robust earnings over the last few years, despite modest growth in revenues. The company has also been focused on reducing its interest in coal and shale-related merchandise that could be a potential drag on revenues owing to a slowdown in the global markets. Moreover, CSX, which currently has a reasonable P/E ratio of 17.38, has also been repurchasing shares over the last five years to the delight of investors. The current consensus for CSX’s earnings for Q1 2015 is $0.45 a share. CSX shares, which have mostly traded in the $32-$36 range in the last three months, carry a price estimate of $33.46 a share, and a ‘buy’ guidance.
