Getting Railroaded by CSX

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I knew that railroad companies like CSX (NYSE: CSX) were still talking about operational improvements, but they've said that a lot in the past, only to let down believers. Despite my skepticism, though, things are getting better at this eastern rail operator.

Revenue in this quarter rose nearly another 11%, as strong rail results offset an unimpressive performance in the intermodal business. Intriguingly, that revenue jump was accomplished amid flat rail volumes. While I'm sure some of the increase is from fuel surcharges (I didn't see where the company broke that out separately, if it did), some of it must also be coming from rate increases.

I was even more impressed by CSX's quarterly performance on lines below the revenue. Operating income rose 39%, as the company's operating ratio improved to slightly more than 79. That ratio's still much higher than my beloved Canadian National (NYSE: CNI), but it's a nice improvement nonetheless. I was also happy to see improvements in asset utilization; dwell times were down, velocity and on-time arrivals were up, and CSX's safety performance remained respectable throughout.

Even though the rails have kept running, I'm still a little nervous about the sector. Rate increases can't and won't go on forever, and there are still considerable capital investment needs. What's more, I hear more chatter these days about "new valuation paradigms," which is often what you hear near the top of a cycle.

Still, the trucking sector seems constrained by drivers, and high fuel prices usually mean better news for the rails. What's more, CSX hauls a lot of coal, and I'm still optimistic on the coal market. So while I can't honestly say that the stock is a bargain by usual methods, I also won't deny that the company is doing better, the sector is hot, and investors still want to own these shares.

All aboard for further Foolishness:

• Is Norfolk Southern the Rail to Ride?
• Will CSX Stay on the Rails?
• More Workin' Needed on This Railroad

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).