Rail behemoth CSX (NASDAQ:CSX) didn't improve overall volume during the first quarter of 2019, but the company compensated for flat traffic by pricing into demand and continuing to operate as one of the most efficient railroads in North America. Shares rose as much as 6% on Wednesday in the first trading session following the release of CSX's earnings report. Below, I'll review the headline numbers and key success factors of the last three months. Note that all comparative numbers in this article are presented against the prior-year quarter.
CSX results: The raw numbers
|Metric||Q1 2019||Q1 2018||Change (YOY)|
|Revenue||$3.01 billion||$2.87 billion||4.9%|
|Net income||$834 million||$695 million||20%|
|Diluted earnings per share||$1.02||$0.78||30.7%|
What happened with CSX this quarter?
- Merchandise volume (i.e., chemicals, automotive, agricultural, forest products, minerals, metals, equipment, and fertilizers) rose 3%, and coal volume grew 5%. These categories were offset by intermodal traffic, which declined by 5%.
- Intermodal volume dipped in part because the company has been winnowing its low-density intermodal lanes in an effort to optimize this lucrative business. While the exercise curbed domestic traffic, intermodal traffic from international customers increased during the period.
- Overall, total volume (merchandise, coal, and intermodal) was flat at 1.53 million units in the first quarter.
- Total revenue per unit increased by 5% to $1,968 via pricing gains that management described as "broad-based."
- Operating margin jumped roughly 400 basis points to 40.4%, as total expenses declined by 2% even as revenue rose.
- Average train velocity jumped by 17% to 20.4 miles per hour, while average terminal car dwell time decreased by 14% to 8.9 hours -- both were record results.
- Not surprisingly given the company's overhead expense control and train efficiency metrics, CSX achieved its lowest ever first-quarter operating ratio. The first-quarter efficiency reading of 59.5% significantly outpaces the 63.7% recorded in the prior-year quarter.
- CSX announced a new $5 billion share repurchase authorization in January after completing the previous $5 billion repurchase program in less than one year. The railroad repurchased $796 million worth of its own stock in the first quarter of 2019.
- In late February, CSX issued $1 billion of long-term notes with interest rates ranging from 4.25% to 4.5%. The borrowings will be used for general purposes, including the repurchase of shares.
What management had to say
In CSX's earnings press release, CEO James Foote lauded the organization's ongoing success and vigorous start to the new year: "The CSX team of exceptional railroaders continues to execute across all aspects of our business, delivering new all-time high service levels. These results reflect the strength of our Company's operating model and our commitment to providing a best-in-class service offering to our customers."
Foote's comments figure as more than idle praise. Last year, CSX set a record among U.S. Class 1 railroads by generating a full-year operating ratio of 60.3% -- this quarter's operating ratio of 59.5% is a sequential decrease against last year's formidable productivity base. CSX is also slowly but surely improving on its safety record: The company's reportable personal injury and train accident frequency rates decreased by 32% and 35%, respectively, this quarter.
CSX doesn't provide investors with earnings guidance. Yet its near-term prospects appear to be quite bright. Management has made difficult decisions in its rather strict implementation of precision scheduled railroad (PSR) principles, such as trimming the company's workforce. Average first-quarter 2019 head count of 22,194 represented a 5.5% decrease over the first quarter of 2018.
But this intense adherence to the railroad's productivity plan has enabled tremendous improvements in net earnings and cash flow since the launch of the PSR drive in late 2017. As long as the U.S. economy continues in its current mode of moderate expansion, CSX has the opportunity to drive efficiency and profits even higher.