Nearly a half-century ago, many investors expected our nation's aging railroad network to continue on its track to uselessness -- but that didn't happen. Fast-forward to today, and the railroad industry is booming again. Even one of the world's greatest investors, Warren Buffett, saw opportunity and acquired Burlington Northern Sante Fe in 2009. Meanwhile, CSX (NASDAQ:CSX) stock has risen 11% higher this year, hovering just under its all-time high.
Let's look at how the company navigated through a bumpy start to the year, and where it's going from here.
Like many companies, CSX was hurt by harsh winter weather throughout the first quarter. Labor and fringe expenses typically account for about one-third of CSX's overall expenses, and those costs increased 6% to $814 million from last year's first quarter, with winter weather accounting for nearly 75% of that increase. In fact, management estimated the brutal winter cost the company $0.06 per share of earnings, out of CSX's recorded $0.40 earnings per share, in the quarter.
While the winter weather petered out in the second quarter, it brought a new problem for CSX: catching up with demand.
The tale of CSX's second quarter was its scramble to control the higher-than-expected surge in carloads. Carload volume jumped 14% from the first quarter, which negatively affected the company's network performance: year-over-year on-time arrivals dropped from 82% to 42%. Meanwhile, while carload volume rose, train velocity dropped, and the number of hours carloads spent in terminals increased -- not a favorable mix when trying to catch up with demand.
The track ahead
Investors will be tuned into the third-quarter results in mid-October to see if the company's network performance stabilized as it worked through the demand issues.
Improvement in on-time arrivals, increase in train velocity, and decrease in time dwelling idle in terminals would be much-needed steps forward. In fact, it would be a big disappointment if all three of those factors don't improve sequentially.
Before moving to the second point, check out this pie chart to get a better feel for how CSX's generates revenue among its three segments:
Combining those three segments divided by unit volume is CSX's total revenue per unit, or RPU. The company's RPU in the second quarter was $1,821, compared to last year's $1,839. As merchandise continues to gain strength and coal slowly rebounds, total RPU should push higher; a jump in the third quarter would be a welcome development.
In fact, Moody's Investors Service earlier this month upgraded CSX's ratings on the belief that the company's domestic coal business had little risk of further declines.
One last factor for investors to watch is the ongoing energy boom in the United States. CSX has taken advantage of the opportunity to send carloads in both directions -- meaning fewer costly one-way trips -- to supply oil and natural gas companies with necessary products and chemicals.
Despite CSX stock trading very near its all-time high, the company's P/E ratio of roughly 18 is still cheaper than the industry average of 21.5. While investors wait for improving network performance and coal shipments to increase CSX's top and bottom lines, they can feel confident in the company's proven ability to return value to shareholders through share buybacks and increasing dividends.
Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.