CSX (NYSE: CSX ) , the largest railroad operator in the Eastern United States, provides rail, intermodal transportation services, trucking dispatch operations, and operates storage and distribution centers throughout the U.S.
Today, let's look at three things investors should be watching regarding CSX, as they will provide us better insight into the company.
1. The health of the coal industry
Coal, thou hast forsaken me! With natural gas prices still riding near decade lows, and alternative energy and cleaner fuels still the rage, many electric utilities are ponying up big bucks to transform coal-fired plants to run on cleaner and cheaper forms of fuel. That has caused domestic coal demand to dry up quicker than Derek Zoolander can say "I think I've got the black lung, pop!"
In CSX's second quarter, the company reported a 14% decline in coal revenue, primarily driven by the sharp drop-off in domestic demand. However, CSX actually noted that international shipments rose by 41% in the second quarter and 29% during the first half of 2012. So, a need for coal resources in international markets is somewhat offsetting declining domestic consumption. Due to coal's importance to CSX -- it accounted for 27% of total revenue in the second quarter -- this trend will be critical to watch. The shift to international markets does lead me to believe that overall demand won't fall off a cliff as soon as some have predicted.
Earlier this year, Arch Coal (NYSE: ACI ) inked a long-term contract to ship up to 10 million tons of coal annually through the Gulf Coast in an attempt to quadruple its international shipments over the next decade. Coal companies see opportunity in overseas markets, and CSX will continue to play a key role in the transportation of this vast resource.
2. Intermodal and industrial growth
Despite a 14% drop-off in coal revenue, CSX's overall revenue was only marginally lower while income grew 2% during the second quarter thanks to growth in intermodal and industrial shipments, which appear to be the new pathway by which CSX will grow.
Intermodal transport, of which CSX controls about 20% of freight volume market share according to Trefis, is becoming the primary transport choice. Using one container for various modes of transport (ship, rail, truck), reduces damage and handling costs, which means better margins for everyone involved. CSX operates roughly 50 intermodal terminals, and the company saw freight volume gains of 4% in the second quarter.
Alternative transport goods are also driving growth. Industrial transport revenue shot up by 13% in the second quarter as automobiles and plastics drove growth. That figure really shouldn't surprise anyone as car sales have been surpassing expectations in 2012. Year-to-date, General Motors (NYSE: GM ) and Ford (NYSE: F ) have reported an increase in total units sold by 18% and 15.6%, respectively, through July.
Agricultural strength due to the nation's drought may also provide help to CSX's bottom line. Fertilizer and phosphate producer Agrium (NYSE: AGU ) recently boosted its earnings forecast on very robust demand for its crop-nutrition products. Higher fertilizer demand may more than balance out the reduction CSX may face in reduced crop yields due to the drought.
3. Cost controls
Keeping expenses under control is important in any business, and volatile fuel costs make this task even more critical.
Higher fuel prices can actually work in CSX's favor, however. High prices of diesel generally discourage companies from shipping by truck and result in a boost for rail traffic. On a per-ton basis, railroads are considerably more efficient shippers than trucking companies, but obviously the path can sometimes be much less precise and less timely.
Therefore, controlling both fuel and labor costs are an important factor to CSX's success, and recently, the company has done a masterful job at controlling both. CSX has been pulling workers from its struggling coal rails and placing them throughout other parts of its network that are currently in high demand. It also managed to reduce its fuel costs by 5% to $410 million in the latest quarter. Both factors have moved operating margins higher from just 8% in 2003 to more than 29% in 2011.
Now that you know what to watch for, it should be easier to analyze CSX's successes and pitfalls in the future and hopefully give you a competitive investing edge.
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