For years, the railroad industry has worked hard to respond to tough conditions in what used to be its core markets, adapting specifically to the plunging demand for coal. CSX (NASDAQ:CSX) in particular historically got a lot of its business from serving the coal industry, given its geographical emphasis on the Appalachian region of the U.S., but it has sought to diversify its shipments to reflect new economic realities for its clients. Coming into Wednesday's third-quarter financial report, CSX investors were prepared to see yet another decline in sales and net income. Although the railroad did in fact see those drops, they weren't as bad as many had expected. Let's look more closely at the latest from CSX and what the railroad anticipates in the near future.
How CSX did during the quarter
CSX's third-quarter report showed that the railroad is still fighting against adverse trends that are holding back the entire industry. Sales fell 8% to $2.71 billion, which just about exactly matched up with the consensus forecast among those following the stock. On the bottom line, CSX suffered a slightly larger 10% decline to $455 million. That produced earnings of $0.48 per share, which was down from the previous year but topped investor expectations by $0.03 per share.
Looking more closely at CSX's numbers, the railroad continues to see its overall volume figures remain under pressure. Total volume fell 8% to 1.57 million units, and the amount that CSX collected from fuel surcharges got cut in half, representing about 2.5 percentage points of the revenue decline. The railroad's operating ratio, for which lower values are better, worsened slightly, coming in at 69%. CSX once again noted that the strength of the U.S. dollar and ongoing weakness in global commodity markets contributed to the sluggish performance from the railroad during the quarter.
Yet keeping expenses under control helped add to profit. Total expenses were down by $137 million, or 7%, and efficiency savings were a big part of that decline. CSX saved about $53 million in labor costs, $38 million in materials and supplies costs, and $15 million in fuel costs from various efficiency-related initiatives, and smarter use of equipment helped produce another $6 million in savings.
Taking a look at CSX's different business segments, the single bright spot came from the automotive industry. Volume of auto shipments climbed 6% to 115,000 units, and consistent revenue per unit for the segment also boosted auto-related revenue to $304 million. Elsewhere, though, a small gain in fertilizer volume was offset by falling revenue, and steep double-digit declines in volume of agricultural and food products as well as metals and equipment pulled down CSX's overall numbers. Coal also continued to deteriorate, with a 21% drop in shipment volume to 207,000 units. Even the intermodal unit, which represents more than 40% of CSX's volume, saw a troubling 7% drop in its shipments during the quarter.
Operational figures for CSX were mixed. Personal injury frequencies worsened by 16%, but train accident rates fell by 23%. On-time originations and departures continued to improve, rising by eight and 10 percentage points to 84% and 64% respectively. Train velocities edged upward to 20.8 miles per hour, even as delay times at key terminals got slightly longer at 25.6 hours.
CSX CEO Michael Ward sought to emphasize the positives in what the railroad has done during tough times. "CSX continues to drive strong cost performance and efficiency in this dynamic market environment," Ward said, "while meeting or exceeding customer expectations."
What's ahead for CSX?
Even with its optimism about its efforts to contain costs, CSX still sees some challenging times ahead for the industry. In its outlook for the fourth quarter, CSX identified only the automotive market as being favorable on a 13-week basis, with neutral assessments for the agricultural, fertilizer, and export-coal markets. CSX assessed the rest of its markets as unfavorable, including intermodal, domestic coal, and the chemicals, forest products, minerals, and metals and equipment groups.
As a result, CSX expects that fourth-quarter earnings per share will be flat to slightly down compared to last year's fourth quarter, even though this year's period has an extra week. CSX also anticipates relatively flat volume, and even continued cost savings won't be enough to send its bottom line up substantially.
CSX investors didn't seem all that surprised by the report, and the stock climbed less than 1% in pre-market trading on Thursday morning following the Wednesday afternoon announcement. Cost-saving measures are extremely useful, but until conditions start to improve more dramatically in its core markets, CSX could have trouble mounting a substantial recovery in its business fundamentals.