Bound for Glory, but This Train May Stop

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Once a freight train gets up to full speed, its momentum is something to behold.

Rail carrier CSX (NYSE: CSX  ) resembled a lesson in physics with its fourth-quarter earnings results, as the brakes of a global recession are apparently taking some time to slow this locomotive. Adjusting for a major writedown of the company's famed Greenbrier luxury resort in West Virginia, the company's robust operational performance stands in contrast to recent developments throughout the domestic industrial sector.

With year-over-year increases to both revenue and operating income, CSX rolled along with a 6% increase to adjusted net earnings. The company withstood a 10% decline in overall freight volumes on the strength of both operational efficiencies and a pricing environment that has thus far been resilient to the slowdown. Continuing another positive trend, CSX also improved its operating ratio by 110 basis points to 74.1%.

Stop the train!
If you're thinking all this sounds too good to be true, I agree. During the fourth quarter of 2008, Fools witnessed an incredible one-two punch of abrupt demand erosion and production declines throughout several industrial sectors of the U.S. economy. Pronounced weakness from key manufacturers like Ford (NYSE: F  ) spilled over quickly into metal products, forcing United States Steel (NYSE: X  ) to suspend production at a major mill in St. Louis, and prompting Alcoa (NYSE: AA  ) to cut overall production by nearly 20%.

Even a steaming locomotive can't overcome that kind of braking power, and I expect results from this first quarter of 2009 to look decidedly different for CSX and its competitors. As miners of everything from copper to coal have scaled back their production volumes in recent months, a collision with earnings for the rail companies is -- in my opinion -- inevitable.

Both CSX and competitor Norfolk Southern (NYSE: NSC  ) derive approximately 30% of their revenue from shipping coal. Although I believe coal demand will eventually recover, the near-term outlook here in the U.S. remains somewhat negative. Recent production cuts by giants like Cliffs Natural Resources (NYSE: CLF  ) and Peabody Energy (NYSE: BTU  ) foretell of revenue declines that lie tied to the tracks ahead. CSX sees further price hikes of 5% or more in 2009, which may help to offset volume declines. For the Fool seeking a long-term ride on the freight trains, though, I can't help feeling that tickets may get a little cheaper before long.

Further Foolishness:

Nearly 1,500 Motley Fool CAPS members, including 273 All-Stars, expect CSX to outperform the S&P 500. In all, the CAPS community has shared its collective insight on 35 "road and rail" companies. Join the free CAPS community today and share your views on how the rail industry will fare throughout the current financial crisis.

Fool contributor Christopher Barker has never hopped a freight train, but thinks it would be a fun place to learn the harmonica. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Cliffs Natural Resources and Peabody Energy. The Motley Fool has a disclosure policy named Thomas from the island of Sodor.

Read/Post Comments (3) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2009, at 6:19 PM, jdfarm wrote:

    I have over 2300 shares of NSC(had it at $11.94 a share) plus BTU,CNX and CLF. Good stocks,all. Have you checked stocks in MILLION DOLLAR PORTFOLIO and the rest of your numerous portfolio's lately?

  • Report this Comment On January 21, 2009, at 6:37 PM, XMFSinchiruna wrote:

    I do agree that these are great companies / stocks. I am merely suggesting that we could see a near-term dip in revenue and earnings as freight volumes dip sharply. Several of these companies, like CSX, are trading at or near 52-week lows, so there is clearly at least an extent to which some of this projected weakness has been / is being priced in.

    Fool on! :)

  • Report this Comment On January 21, 2009, at 9:09 PM, glennfparker wrote:

    Although it does take two to tango, CSX Corp. is the one with the "heavy hand" concerning The Greenbrier and its problems.

    1) The union may have to contribute more of health insurance premium and a few other "tweakings", but nothing what CSX is proposing.

    2) Mr. Ward fired a great manager in Paul Ratchford because Mr. Ratchford stepped on his, and others, toes in taking away some costly "freebies" of hotel business from them in restructing The Greenbrier management philosophy.

    3) The Greenbrier, if run properly by treating guests and employees properly, will be the last of the resorts to fail because of the economy. Who would go to the Ritz before going to a property like The Greenbrier? There is only one of "The Greenbrier".

    4) CSX Corp. seems to forget all the money that "The Greenbrier Sporting Club" has contributed to the bottom line in property sales, etc. and although it is a seperate company, for tax purposes, it is really seen as part of "The Greenbrier".

    5) I am not sure that The Greenbrier has had a really good general manager since the days of Mr. E. Truman Wright.

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