This Train Is Gaining Steam

Even as the CSI: Miami team is conducting a forensic exam on the the U.S. housing and automobile markets, the CSX (NYSE: CSX  ) Jacksonville team is celebrating.

With all the attention investors have given to Warren Buffett's railroad picks -- Norfolk Southern (NYSE: NSC  ) and Burlington Northern Santa Fe (NYSE: BNI  ) -- Eastern U.S. specialist CSX took the market by surprise Thursday, significantly boosting its guidance for earnings through 2010. Shares shot up by 10% as the company raised 2008 earnings estimates to $3.65 to $3.75 per share. It also increased the forecast for compound annual earnings growth through 2010, to 20% to 25% from 18% to 21%.

CSX also noted that falling fuel prices are providing a "tailwind" for margins in the present quarter, and pointed out that it's expanding its operating margins while those margins are contracting for its peer group as a whole. Still, the 23.3% margin achieved over the past 12 months is a far cry from the 33.7% margin at rival Canadian National Railway (NYSE: CNI  ) in the second quarter.

What could be taking up the slack for rail volumes lost to the weakened domestic housing and automotive markets? It's king coal to the rescue. CSX reported on Thursday that export volumes for coal will increase 50% in 2008 to 30 million tons, and that coal now accounts for 29% of the company's total revenue. Judging by the company's decision to invest more money than previously envisioned to acquire coal-carrying rail cars, CSX has joined a growing list of companies anticipating continued strength from coal for some time.

With its rail infrastructure strategically positioned to carry U.S. Appalachian coals to three shipping terminals on the Atlantic and the Gulf coasts, CSX looks to be a substantial beneficiary of the ongoing global boom in demand for coal. At these historically high prices for coal, Appalachian miners like Massey Energy (NYSE: MEE  ) and Patriot Coal (NYSE: PCX  ) surely will be happy to fill as many rail cars for transport as CSX and other railroads can provide.

Further Foolishness:

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• Peabody's Improbable History
• Norfolk Southern steamed ahead full throttle last quarter