5 Things CSX's Management Wants You to Know


Source: CSX.

Railroad giant CSX (NYSE: CSX  ) gave investors mixed results when it announced its second-quarter earnings last month, with revenue coming in below expectations even as CSX topped earnings estimates. But even though the report didn't inspire shareholders to add to the stock's impressive gains over the past year, CSX had a lot to say about its long-term future, with plenty of confidence about the railroad's ability to overcome the challenges posed by changing conditions and produce results. Let's take a look at five choice comments from last month's CSX conference call.

We handled volume levels this quarter that exceeded our expectations, while maintaining stable operations, and we're taking additional steps to return service to the high levels that our customers have come to expect from CSX.
--CEO Michael Ward

Ordinarily, you'd think that high volumes would be exactly what a railroad like CSX would want to see. But at some point, dealing with extra cargo to ship becomes unsustainable, and CSX saw the impact of operational inefficiencies on its performance numbers during the second quarter. Even though car-load volume jumped by 14%, the speed at which trains ran fell by more than 15%, and that lengthened delays at terminals and slashed CSX's on-time arrival record by almost half.


Source: CSX.

CSX CEO Michael Ward acknowledges the need to keep customers happy, and even though increased volume suggests a lack of capacity more broadly throughout the industry, people remember when their cargo didn't get through in the time frame they expected. With Ward expecting CSX's performance to improve, investors will want to see a marked increase in efficiency metrics to confirm CSX's efforts.

With a positive outlook across most of the markets in our portfolio, the core earnings strength of CSX's business is now becoming more evident.
--CFO Fredrik Eliasson

Source: CSX.

Even as some begin to question the sustainability of the economic expansion broadly, CSX sees few signs of any future sluggishness in its operations. In the agricultural segment, CSX expects that last year's record harvest will continue to drive shipments for the immediate future. Growth in chemical shipments should last as long as oil and gas producers need materials to expand their own production capacity, and so far, domestic oil and gas shows no signs of slowing. CSX believes that production of light vehicles in North America will climb 9% in the current quarter, and growth in the intermodal segment will reflect CSX's efforts to boost service. Even coal could rebound as U.S.-based utilities start to build inventories back up from their current low levels.

Many of the doubts about CSX have stemmed from its past reliance on coal. But with the railroad now having a more diverse portfolio of customers, it's better prepared to handle whatever comes on the economic front.

We are quite excited about the potential for the new car design as well as the retrofits to the existing cars. -- Ward

CSX and other railroads have recently faced the specter of increased safety regulation, especially as transportation of crude oil and other flammable products raises concerns about the severity of any potential future accident. Ward did note that he believed that possible restrictions like cutting maximum speeds on crude-oil trains to 30 miles per hour "would be very bad," but he believes that the strongest proposals are unlikely to go into effect.


Photo credit: Flickr/Roy Luck.

Yet CSX prides itself on safety, and Ward touted the railroad's support for measures to improve the quality of railcars. If by embracing safer tank cars, CSX can avoid more draconian regulation, then investors will end up with the best deal possible.

Going forward, I think all modes of transportation have an opportunity to price up significantly, particularly in this type of economic environment. When you couple that with what's happening in 2014 and you look at the projections for 2015, we're in a very robust pricing market in virtually all modes of transportation.
--Clarence Gooden, Chief Sales/Marketing Officer

Railroads have prospered over the past decade because of the rise in fuel costs, but transportation generally remains dependent on economic activity. Transportation companies are closer to the ground in measuring that activity than anyone else, and Gooden's comments about industry conditions bode well not just for CSX investors but for the health of the entire U.S. economy.

Source: CSX.

Obviously, though, CSX shareholders want the railroad to get more than its fair share of any expansion. Given that fuel costs are still persistently high, railroads have a competitive advantage over trucking, and that's likely to remain the case for the foreseeable future.

We like to think that a large part of our business can grow faster than the economy as a whole because of opportunities and the secular trends that we're seeing.
--Eliasson

CSX believes that it has done a good job of tapping into the strongest areas of the overall economy. Certainly, by serving the energy industry, CSX hopes that the domestic energy boom will continue and drive increased traffic well into the future. Similarly, the auto industry has seen solid results lately, and agricultural products continue to enjoy favorable pricing to support profits and demand. Those positive effects should be enough to counterbalance any drag from weaker-producing segments, and that could support CSX earnings well into the future.

CSX stock hasn't given investors quite as strong performance as they'd like to see. But with the railroad's prospects looking up, the future might well become much brighter for those shareholders who stayed with CSX through the tough times.

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