CSX Corporation Beats Estimates and Continues to Return Value to Shareholders

CSX Corporation (NYSE: CSX  ) was able to bounce back from a disappointing fourth quarter and beat analyst expectations in the first quarter of 2014. Earnings per share checked in at $0.40 on $3.0 billion in revenue. Harsh winter weather heavily affected CSX's results in the first quarter, but the key question is whether or not the company will be able to make up the lost earnings throughout the year.

Q1 results
Splitting CSX into its three business segments -- merchandise, intermodal, and coal -- the first two segments provided enough revenue growth to offset continued weakness in coal.


Source: CSX Corporation's first-quarter presentation

Merchandise revenue jumped 4% on a volume increase of 2%, and a strong 2013 harvest continued to drive agricultural sector growth: Revenue from agricultural products increased 18%. CSX's industrial sector contributed the majority of revenue to overall merchandise figures with chemical's 10% revenue increase leading the charge in the first quarter.

Intermodal also posted growth with volume increasing 5%, which was enough to boost revenue by 4%. Growth was driven by success with highway-to-rail conversions and strong demand for intermodal service offerings. Intermodal and merchandise business grew just enough to offset coal's 1% decline in volume, which produced a 9% decline in revenue.

The upside for investors is that CSX believes 2013 will be the weakest for coal demand and that volume and pricing should improve this year. That prediction is already beginning to come true as domestic coal volume improved 8% in the first quarter. Although, despite the improvement in domestic coal it was largely offset by export coal's significant 15% decline in volume. As global stockpiles of coal continue to be worked through and prices of cheaper natural gas alternatives rise, look for coal volume to rebound and help return CSX to higher earnings-per-share results over the next two to three years.

The biggest remaining questions for investors are: How much did the winter weather affect business, and can the lost earnings be made up during the rest of this year?

Harsh winter weather
What a brutal winter it was, especially for CSX, which was directly affected as weather-related expenses ballooned. Management estimates that the weather cost the company $0.06 in earnings per share because of increased labor, equipment, and other rising costs. Management also estimated that revenues were negatively affected between $0.02 and $0.03 per share.

Labor and fringe expense, which typically is about one-third of CSX's overall expenses, increased $190 million from last year's first quarter. As the weather worsened, CSX was forced to increase the number of crews working and locomotives employed. In addition to more crew members, CSX also paid out significantly more overtime to its employees, which led to a $35 million labor cost increase.

The weather was a primary factor in the 16% drop in operating income to $739 million and its operating ratio increasing 520 basis points to 75.5%. Management still believes that it can reach its goal to sustain the operating ratio in the high 60s in 2015. 

Looking ahead
Even with the weather disruptions leading to higher expenses and a worse than expected operating income in the first quarter, management maintains its guidance for modest growth in 2014. That means investors can expect stronger volume and revenue improvement over the next three quarters. To be more specific, the majority of lost shipping volume due to the weather should be made up in the second quarter. Investors should note that while volume will improve significantly, higher costs may linger in the second quarter which could hinder operating income yet again. 

A bright spot for CSX investors is no doubt the company's ability and history of returning value to shareholders through dividends and share buybacks.

Consider that CSX has increased its dividend 11 times over the last eight years, which equates to a 20% compound annual growth rate over that time frame. CSX again bumped up the quarterly dividend 7% to $0.16 per share, which will be payable on June 13, 2014. CSX also repurchased 5 million shares for $127 million, or $25.4 per share, compared to the zero shares repurchased during last year's first quarter.

Few companies can consistently return value to shareholders over the long haul; when dividends rise and outstanding shares decline, over the course of years, it forms an X when graphed.

CSX Dividend data by YCharts

CSX's proven history of returning value to shareholders could give potential investors reason enough to buy in and wait for a rebound in coal, which would significantly brighten the companies earnings prospects throughout the remainder of this decade.

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