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What Powered CSX Railroad's Record First-Quarter Profits?

By Motley Fool Staff – Updated Apr 23, 2018 at 6:03PM

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Improved operations were key, but factors elsewhere in the freight transportation space are also making rail a more attractive option.

In this segment from the MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker take a gander at the results from freight railroad giant CSX (CSX 1.62%), which earned almost $700 million in its first quarter -- a huge beat relative to expectations, with bottom-line growth of more than 50% annually.

The Fools talk about exactly how the company pulled that off -- partly through better operational management and partly due to higher oil prices and insufficient manpower in a rival segment.

A full transcript follows the video.

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This video was recorded on April 18, 2018.

Chris Hill: Sticking with transport, we'll move to CSX Railroad, which put up a record first quarter profit just shy of $700 million. I was thinking about CSX the other day, just because over the weekend, I was at my son's soccer game, and the field happened to be relatively close to the railroad tracks here in Alexandria and it was just rolling by. And I thought what I usually think when I see CSX trains rolling by, which is, "Should I be owning that stock?" [laughs] It really does seem like, railroads aren't necessarily the sexiest business in the world, but the barriers to entry are so massive, and if you have people who are a doing a halfway decent job of running the business, then it's going to be delivering relatively steady profits over a good length of time.

Bill Barker: Halfway decent is a good thing to focus on. CSX, short story, blew out the earnings expectations, came in at $0.78, I think $0.64 was expected per share, falling on $0.51 a year ago, so that's over 50% bottom line growth over the year. Now, the actual capacity of the railroads and the revenue isn't growing like that, but they've improved their service. And when we say they've improved their service, let's focus on one data point for a moment here. In the first quarter, this is an improvement, 57% of their deliveries came in within two hours of on time. So. OK. That doesn't sound great.

Hill: No.

Barker: If that was your experience with airlines, you would be moving to another airline. Their goal is to get to 95% by 2020, so they have, as we sometimes talk about, an easy act to follow, which is their own act. And they are improving it, and there is room for improvement. So, it might be a good time to look at railroads. It's just, trucking right now, there's a lot of capacity constraint in the trucking industry, as there aren't enough truck drivers at the moment. If you're looking for a job and you have skill driving a truck, you've probably got offers that you're fielding.

That, combined with some increased regulatory requirements on the number of hours that drivers can actually drive, which started at the beginning of the year but was given a soft launch in the first quarter and is now supposedly being actually implemented a little bit more effectively. After giving companies three months to get used to it, now they're going to start enforcing it. All this means that there's going to be a spillover for rails. And with oil prices, gas prices going higher, that's another good mark for rails. And they have an easy act to follow. If they can increase their on-time delivery to 95% which is the goal, from 57%, I have no doubt that they're going to be a great stock over that period of time.

Bill Barker has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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