The railroad industry has managed to work its way through tough times, and CSX (NASDAQ:CSX) has started to see improving results in the recent past. Even though railroads still face plenty of challenges, investors have been increasingly optimistic that the moves to boost efficiency and find new strategic directions toward faster growth will pay off in the long run.
Coming into Tuesday's third-quarter financial report, CSX investors wanted continued steady progress toward a sustainable growth trajectory. The railroad largely met those expectations, but the open question is whether it can start to accelerate its growth to take advantage of new opportunities for the industry. Let's look more closely at CSX and what its latest results say about the future.
CSX stays resilient
CSX's third-quarter results weren't hugely impressive, but they showed how the railroad could hold its own. Revenue was up 1% to $2.74 billion, which was slightly slower than the 2% growth rate that moves investors had wanted to see. Net income also inched higher by 1% to $459 million, and the resulting earnings of $0.51 per share matched the consensus forecast among those following the stock.
From a fundamental viewpoint, CSX saw the biggest gains from some segments that had produced difficult results in past years. Gains in coal shipments and the intermodal business led revenue higher, with most of CSX's merchandise markets suffering offsetting declines that held back its overall sales. All-in comparable pricing was up 3.5% on an all-in basis, with export coal again helping to boost results. Pricing in the merchandise and intermodal business was up a more modest 2.2%.
Among various segments, the agricultural segment suffered volume declines because of export challenges and a large grain crop in the Southeastern U.S. that diverted shipments to other forms of transport. Industrial volumes were also down as crude oil shipments weakened, and automotive volume declines were substantial because of reduced production. In housing and construction, shipments of minerals and foreset products were both down. Yet coal volumes were higher entirely because of exports, as domestic volumes were down because of hurricane-related issues and idled steel production customers. Intermodal saw substantial international volume gains thanks to CSX's strategic position on the East Coast, where ports saw heavy traffic.
CSX also kept benefiting from other factors. The $83 million that the railroad collected in fuel surcharges was up by almost 30% from the year-ago period. Costs were down minimally during the period, with rising inflation and fuel prices getting offset by greater efficiency, especially in the labor and fringe benefits arena. Restructuring cut management headcounts, and that drove much of the savings that supported profit growth during the quarter.
Operationally, CSX dealt with difficult challenges. Personal injury and accident rates were up substantially from year-ago levels, and train velocities were slower as dwell time at terminals rose. On-time originations and arrivals were both down sharply.
What's next for CSX?
CEO Hunter Harrison nevertheless pointed to positives. "The company's results for the third quarter reflect the resiliency of Precision Scheduled Railroading," Harrison said, "even during times of transition." The CEO said that the railroad will now focus on improving service now that its transition is largely complete.
CSX believes that its future could get a lot brighter. The company thinks that after adjusting for restructuring charges, full-year operating ratios should remain in the mid- to upper-60%s, which would represent solid performance. CSX expects earnings growth of 20% to 25% compared to full-year 2016 figures. Free cash flow before dividends of roughly $1.5 billion should give the railroad plenty of flexibility to allocate capital.
Investors in CSX were generally content with the report, and the stock climbed almost 3% in trading on Tuesday following the morning announcement. Yet with the company's $1.5 billion share repurchase program having already been complete, investors will have to watch closely to see if CSX stock is able to hold its own even if it isn't able to restore its operational success to optimum values as quickly as they would like.