Rail operator CSX (CSX 0.12%) successfully offset macroeconomic pressures by tightly managing its business in the third quarter of 2019, as illuminated by results released Wednesday after the markets closed. The transportation giant was able to compensate for slighter volumes and decreased freight revenue by managing its operations with a record-breaking degree of efficiency. As we walk through the quarter below, note that all comparative numbers are presented against the prior-year quarter.
CSX results: The headline numbers
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$2.98 billion||$3.13 billion||(4.8%)|
|Net income||$856 million||$894 million||(4.3%)|
|Diluted earnings per share||$1.08||$1.05||2.9%|
Important details from the quarter
- Volume decreased by 5% to 1.57 million units, as flat merchandise volume was offset by 9% declines in both the coal and intermodal categories. Management mentioned during the company's earnings conference call that a Philadelphia refinery explosion at the end of June was an anomalous event; without this impediment, merchandise volume would have improved by 2%.
- Management also pointed out that intermodal volume was once again affected by the company's lane rationalization efforts (i.e., closures of underperforming intermodal routes). The company will finish lapping these changes early next year, relieving comparative pressure on intermodal volume reporting.
- Revenue per unit was flat at $1,898 due to firm pricing and favorable product mix.
- CSX achieved its lowest-ever operating ratio of 56.8%, against a reading of 58.7% in the comparable period. The operating ratio is derived by dividing total expenses by total revenue; lower readings indicate higher achieved productivity during a given period. Management noted that the current-quarter mark also sets a record for any Class 1 railroad.
- The company's cost efficiency is reflected in major income statement line items. Labor and fringe expense dropped 8% to $638 million. The company attributed this mostly to fewer crew starts and lower headcount. Indeed, average headcount during the quarter decreased 6% year over year to 21,331. Average employee count also decreased 2%, or 475 employees, from the previous sequential quarter (Q2 2019).
- Materials, supplies, and "other" expense diminished by 12% to $415 million, which the company traced to decreased operating support costs, reduced trucking and terminal costs, and a lower level of equipment maintenance expense.
- Fuel expense fell by $45 million to $233 million from a combination of factors, including a 13% drop in average fuel price, improved fuel efficiency, and lower volume.
- Due to the cost discipline and productivity gains noted above, operating margin jumped 190 basis points to 43.2%.
- Train velocity increased by 13% to 20.3 miles per hour, while terminal dwell time also made progress, dipping 3.2% to 9.2 hours. On-time originations of 93% easily outpaced the comparable quarter's 85% benchmark, but on-time arrivals slipped 1% to 79%.
- CSX continued its fervid repurchase activity, buying back $1.1 billion worth of its shares on the open market during the quarter and bringing its year-to-date repurchase total to $2.8 billion. As can be deduced from the table above, the steady decline in share count over the last year through share repurchases enabled the railroad to improve diluted earnings per share this quarter despite a decline in net income.
Optimism despite a crimped outlook
Last quarter, management was forced to acknowledge the effects of a moderating economy by revising CSX's full-year revenue forecast from 1% to 2% annualized growth to an anticipated year-over-year decline of 1% to 2%. Given its record operating ratio performance, CSX delivered a generally favorable quarter for investors this time around; shares were up 2% at midday in the Thursday trading session.
For more perspective on this industrial stock investment, I'll leave you with CEO Jim Foote's thoughts on the full-year outlook and the organization's larger prospects going forward, as relayed during CSX's earnings call yesterday evening:
Freight demand is generally in line with the expectations set out at the end of last quarter when we adjusted our forecast to reflect what we felt was a realistic view of softer underlying economic activity. Nothing in the industrial economy has really changed since then. Despite the swing from a plus 1% to 2% growth environment to a down 1% to 2% environment, we are maintaining our full-year operating ratio guidance of below 60% and we are still on course for record operating cash flow. These are impressive accomplishments.
We have fundamentally changed CSX over the last two years, not just in how the company operates, but also the way we approach our business and our customers. We are encouraged by our customers' positive response to our improved service and are working tirelessly to find innovative new ways to better serve their needs. Despite the significant progress made to date, we are still -- there are still meaningful opportunities to operate more efficiently and reliably as we move toward our goal of being the best-run railroad in North America.