How CSX Can Restart Its Earnings Growth Engine

CSX (NYSE: CSX  ) will release its quarterly report next Tuesday, and investors have already prepared for a slight reduction in the company's net income from a year ago. But even as the railroad industry has had to deal with the big drop in domestic demand for commodities like coal and iron ore, it has found ways to replace lost revenue and hold its own against unfavorable trends, and that's a big part of why CSX earnings have held up as well as they have.

CSX in particular faces the challenge of being concentrated in the eastern part of the U.S., which has historically relied more on coal shipments and which doesn't have the access to West Coast export capacity that some of its competitors have. Yet the company has managed to overcome that challenge with the help of some innovative strategies. Let's take an early look at what's been happening with CSX over the past quarter and what we're likely to see in its quarterly report.

Stats on CSX

Analyst EPS Estimate

$0.47

Change From Year-Ago EPS

(4.1%)

Revenue Estimate

$3.02 billion

Change From Year-Ago Revenue

0.2%

Earnings Beats in Past Four Quarters

4

Source: Yahoo! Finance.

Will CSX earnings pick up steam this quarter?
Analysts have modestly dropped their views on CSX's earnings prospects over the past few months, cutting a penny per share from their estimates for both the June quarter and the full 2013 year. The stock has largely stayed stable, rising about 3% since early April.

CSX started the quarter off right, reporting record earnings in the first quarter despite posting roughly flat revenue. That was much better than the slight declines in sales and profits that investors had expected, and it came even though CSX reported coal volumes that were down 10%.

But CSX has recognized the potential of moving important commodities like crops and oil from the center of the country to the East Coast. The success that Union Pacific (NYSE: UNP  ) has had in transporting oil across the country has inspired plenty of copycat moves from its railroad rivals as they all seek to make up for lost revenue elsewhere. For its part, CSX expects to spend $2.3 billion on infrastructure improvements like higher bridges, larger tunnels, and improving clearance to allow for double-decker-container transport to ports on the Atlantic coast. Kansas City Southern (NYSE: KSU  ) is also trying to capitalize on this trend, with its own plans to spend half a billion dollars on capital expenditures this year.

Moreover, coal hasn't been a complete bust for CSX. Both CSX and peer Norfolk Southern (NYSE: NSC  ) have exposure to the coal-rich Appalachian region, and they've found emerging markets like China and India are still willing to ship coal halfway around the world as a cheaper alternative to limited supplies of oil and natural gas. Even domestically, extremely low natural-gas prices have been the primary driver of the move away from coal, and as gas prices return to more typical levels, the relative costs of dealing with side effects of coal use like pollution will encourage greater coal consumption.

When CSX reports earnings, watch for the company to discuss the status of its capex program and whether those improvements are starting to pay off in higher profits. In the long run, those investments will be essential for the railroad company to grow faster.

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