What: Shares of CSX (NYSE: CSX ) plunged nearly 7% in early morning trading after the company posted fourth-quarter results after the bell on Wednesday. Despite CSX having a strong 2013, accompanied by a 42% rise in stock price, its fourth quarter brought a profit decline of 5%. CSX managed to increase its revenue 5% to $3 billion despite extremely weak coal demand.
CSX earned $426 million, or $0.42 per share, in the fourth quarter compared to $449 million, or $0.44 per share, for the same quarter last year. Those results fell slightly short of analysts' expectations of $0.43 per share on revenue of $3.01 billion.
For the full-year 2013, net earnings were $1.83 per share, an improvement from $1.79 per share in 2012. Full-year revenue increased 2% to $12 billion with its operating income remaining flat at $3.5 billion.
So what: Coal volume and revenue fell 5% and 9% in the fourth quarter while intermodal and chemicals revenue rose 10% and 17%, respectively. Investors should note that despite weak coal demand, CSX delivered 6% volume growth in carloads of freight during the quarter; although, investors have a hard time letting coal's weakness slide as it accounts for roughly a quarter of the company's revenue.
Another ding for investors was that the railroad's revenue per carload slipped 1%, which means the company could be having difficulties with its pricing power for shipments.
Now what: One thing for investors to keep an eye on this year will be CSX's operating ratio. Operating ratio is simply a measure of management's efficiency for reining in costs; if the ratio is smaller it reflects the company's ability to generate profit amid falling revenue. CSX is aiming for its operating ratio to be in the high-60s by 2015. While the company says it's on track to reach that goal, investors should note that its operating ratio actually increased from 70.6 in 2012 to 71.1 in 2013.
While its operating ratio didn't improve last year, the company has made long-term moves by trimming 20% of its management over the last decade which has helped bring labor expense down to 26% of revenue from nearly 40% in 2002. Another factor for investors to watch in 2014 are CSX's maintenance and capital expenditures because railroads must maintain their roads and rails; if those expenses eat up more than 19%-20% of its annual revenue it could eat into earnings.
As the company continues to trim its costs the railroad expects the economy to continue growing and will be ready to take advantage of such growth. Compared with the trucking industry, shipping by rail is less expensive for long distances and is up to four times more fuel-efficient per ton-mile – giving the industry a leg up as the economy improves. If investors expect a slight turnaround in coal volumes this could be a good time to buy in. Stifel Nicolaus analyst John Larkin sums it up concisely: "It is our hope that, sometime during the remainder of 2014, we will see a more attractive entry point for those wishing to establish positions or add to current positions in the company's common shares."
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