CSX (NASDAQ:CSX) reported near double-digit top-line growth to close out the last three months of 2018, as revealed by its fourth-quarter results, released after the close of trading on Wednesday. The railroad operator continued to make appreciable progress in improving efficiency as well. Let's take a bird's-eye view of the earnings release, then walk through salient highlights of the quarter. Note that all comparative numbers in this article are presented against the prior-year quarter (the fourth quarter of 2017).
CSX results: The raw numbers
|Metric||Q4 2018||Q4 2017||Year-Over-Year Change|
|Revenue||$3.14 billion||$2.86 billion||9.8%|
|Net income||$843 million||$4.1 billion||N/A|
What happened with CSX this quarter?
Investors who had thumbed through CSX's weekly carload traffic reports during the fourth quarter were already apprised of the rail giant's 3% growth in volume for the quarter. The company was able to supplement this volume with firmer pricing, resulting in a 7% increase in revenue per freight unit. Management attributed the pricing leverage to improved product offerings and to a continued healthy demand environment for freight.
CSX's volume and pricing strength led to mid- to high-single-digit revenue growth in a number of freight categories, including chemicals, automotive, forest products, and coal (primarily in export coal versus domestic shipments).
Intermodal volume and pricing grew by 2% and 4%, respectively. As I discussed in more detail in my earnings preview, the company is revamping its northwest Ohio intermodal terminal to capitalize on growth opportunities on eastern and western routes. Thus, as management pointed out, the slight uptick in intermodal results during the quarter is positive, given ongoing work to expand the terminal's facilities.
CSX's fuel surcharge revenue jumped 70% to $189 million, while fuel expense rose 4% to $253 million. Fuel surcharges tend to lag actual fuel cost increases by two months, so there is rarely a direct relationship between the two within a given quarter.
The company continued to exhibit impressive progress in lowering its operating ratio, a measure of railroad efficiency determined by dividing total expense by total revenue. A fourth-quarter operating ratio of 60.3% advanced against the prior year's reading of 60.7 (a lower operating ratio indicates higher efficiency).
The actual progress is greater than this difference implies, however. The operating ratio in the fourth quarter of 2017 should be adjusted up to 65.1% to remove the effect of a huge tax benefit received due to that year's U.S. tax legislation. This tax benefit is also the primary reason that fourth-quarter 2017 net income and EPS were so far in excess of the current quarter.
- Management pointed out that the full-year operating ratio of 60.3 set a record for U.S. Class 1 railroads.
CSX completed a mammoth $5 billion share repurchase program, which it began in the first quarter of 2018. The rail giant finished one quarter ahead of an already swift schedule, and promptly announced a new $5 billion authorization on Wednesday.
The 2018 authorization was funded in part by the issuance of $3 billion in debt. It's unlikely that the company will again be able to repurchase $5 billion worth of shares in four quarters without borrowing as it did last year, and/or executing on planned sales of non-essential real estate.
Nonetheless, shareholders should note that CSX's improvements to operating ratio have resulted in higher cash flow, which will allow the company to buy back shares at a brisk clip. Operating cash flow jumped 33% in 2018, to $4.6 billion.
What management had to say
During the company's post-earnings conference call, CEO James Foote discussed specific metrics that continue to optimize under the company's transition to a "precision scheduled railroad" model:
[O]n the efficiency and service side, train velocity saw positive year-over-year and sequential movement, while dwell improved [i.e. decreased] year over year. Only a couple of weeks into 2019, I see positive momentum in both of these metrics, with the company currently seeing record performance in both measures.
..[L]ocomotive miles per day [reflects] the average daily mileage we are able to get out of each locomotive. Locomotives are a significant cost for the company, and by reducing our active fleet, you save on maintenance, fuel, and capital requirements. Improvement in this metric means we need fewer locomotives to move the same amount of freight. Our active locomotive count ended the year down over 300 locomotives, while we grew volume and revenue.
CSX's management doesn't issue a detailed quantitative earnings outlook each quarter. However, executives do provide a bit of general guidance. During the earnings call, Foote advised investors to expect low-single-digit revenue growth in 2019, due to the company's ongoing work on its intermodal lanes, and an expected moderation in export coal prices in the back half of the year.
This represents a deceleration from the organization's full-year 2018 revenue expansion rate of 7%. Still, Foote reiterated CSX's intention to lead peer railroads in operational efficiency this year. In sum, earnings still hold growth potential if CSX can compensate for a slight slowdown in its top line with further decreases in operational expense.