In a thrilling 100-meter dash among top Olympian sprinters -- as the recent dead heat between two American hopefuls reminds us -- the distance between competitors is measured in mere milliseconds.
Similarly, I have characterized the North American railroad industry as a tightly matched group of masterful competitors, where relative strengths could be measured in inches, despite the countless miles they collectively travel every quarter.
Eastern-U.S. hauler CSX (NYSE: CSX ) led off the industry's latest photo finish with solid second-quarter results featuring 7% growth in earnings per share in the face of severe deterioration of the domestic coal market. Amid the historic restructuring of the U.S. coal industry that recently landed Patriot Coal in bankruptcy, CSX saw its domestic coal volumes plunge by 35% over the prior-year quarter! Surging export volumes during 2012 have softened some of that blow, recording a 41% increase in the second quarter that reduced the drop in total coal volumes to 14%. Also offsetting the weakness from coal, continuation of the long-standing industry trend of freight moving from the highways to the rails was reflected in an 8% increase for intermodal (container) volumes.
Given that CSX expects coal export growth to moderate somewhat during the second half of the year, the hauler's expectation of additional earnings growth going forward is a testament to the sort of resiliency and operational excellence that has characterized the industry at large throughout this extended rough patch for the North American economy. CSX moved its freight at a very respectable average speed of 22.4 miles per hour during the quarter, though incredibly the top Olympic sprinters have bested that pace over short distances. Perhaps most impressively of all, CSX trimmed its operating ratio to a very lean 68.7% for the second quarter.
Is it time to ride the caboose?
The dramatic destruction of domestic coal demand has been particularly noteworthy in the Eastern U.S., among operators in the Appalachian coal basins. I suspect that the less favorable position of Eastern coals relative to Western coals may account for some of the trailing divergence in the share performance of Eastern rail haulers versus their Western and northern (Canadian) counterparts. Let's have a look at the relative performance of North American railroad stocks through the following one-year chart:
CSX data by YCharts
Now, take a gander (below) at the corresponding trend in price-to-earnings ratios among the same group of railroad stocks. You'll see that Eastern haulers Norfolk Southern (NYSE: NSC ) and CSX have been discounted relative to Western U.S. railroad Union Pacific (NYSE: UNP ) and northern counterparts Canadian Pacific Railway (NYSE: CP ) and Canadian National Railway (NYSE: CNI ) .
CSX P/E Ratio data by YCharts
Like each of its well-honed peers, CSX has continued to deliver outstanding operational efficiencies and resilient profit growth through an economic cycle that remains challenging to say the least. CSX offers an attractive dividend yield of nearly 2.5% and will continue to reduce its shares outstanding with a further $434 million allocated under the current program. I view the Eastern railroads, and their valuations, as compelling choices today within a group of enticing options, and see CSX as a potential outperformer.