Railroad giant CSX (NASDAQ:CSX) enjoyed a solid fourth quarter to end 2014, with record results once again showing the extent to which the company has managed to grow even in turbulent times for many of its major customers. Yet the recent plunge in oil prices has made some investors nervous about CSX's prospects. For their part, CEO Michael Ward and his management team have confidence that CSX will face any challenges and come through them stronger and larger than before. Let's look at five comments that stood out from the CSX conference call earlier this week.
"We're generating record results by leveraging the most diverse business mix in the company's history with new opportunities across nearly all of the markets we serve."
-- CEO Michael Ward
2014 gave CSX and the rest of the railroad industry a chance to highlight the true value of the railroad infrastructure network in the U.S. and Canada. In addition to the longtime cost advantages in terms of efficiently moving cargo from place to place, railroads have filled in gaps that other transportation networks like oil and gas pipelines simply haven't been able to cover.
Ward sees those efforts paying off, noting how "CSX has transformed itself by forging new capabilities aligned with opportunities in energy, manufacturing, agriculture, and global commerce." He continues to believe that CSX can expand further while still producing stronger financial returns in the long run, and that view reflects the optimism you'll see throughout much of the railroad industry generally.
"For the full year 2015, CSX still expects to achieve double-digit EPS growth."
-- CFO Fredrik Eliasson
After solid gains in 2014, it's reasonable for investors to think that some slowdown in CSX's growth is inevitable. Yet CFO Fredrik Eliasson demonstrated how the strength of the broader U.S. economy should continue to support volume growth, and he believes the intermodal and merchandise segments of CSX's overall business should keep growing even faster than the overall economy does. That said, Eliasson recognizes the potential downward impact of CSX's coal segment, with current expectations that reflect flat domestic coal markets but continued pressure on exports. CSX will need to watch natural gas prices as well as demand for heating and cooling to weigh likely results from the segment.
CSX also has further room to improve operationally. Eliasson sees productivity-related savings of $200 million this year and expects that CSX will maintain pricing pressure to push rates above the level of inflation due to tight capacity conditions. As CSX aims at improving service levels, the railroad should also see higher overall margins that will also fall through to the bottom line.
"Right now, as we look throughout 2015, we don't see any significant impact at all in our crude oil by rail into the eastern markets."
-- Clarence Gooden, chief sales/marketing officer
The railroad industry has gotten a huge boost from moving crude oil from hard-to-reach shale-play areas across the nation, and CSX has gotten its share from markets like the Utica and Marcellus shale plays. Yet even though lower prices could ordinarily lead oil and gas producers to cut their output, CSX doesn't expect much in the way of production cuts from its customers. Moreover, Chief Sales and Marketing Officer Clarence Gooden doesn't think that shipments of fracking sand and other chemicals needed for unconventional production methods will drop off either.
More important, Gooden believes the positive impacts of lower energy prices on consumers and the rest of the U.S. economy should more than offset any possible impact on CSX's energy business. With crude oil by rail making up less than 2% of CSX's business, competitors that are more reliant on moving crude could see a bigger hit than CSX will.
"We've had a good almost 11-plus weeks where Chicago has been on what we call a normal alert level and so that's the good news. ... [B]y and large, the entire industry is working very closely and very well so far with that."
-- COO Oscar Munoz
One big problem the railroad industry has had to deal with is the snarl of traffic at key interchange points, where various rail networks intersect. Chicago is arguably the most important of those interchange points, and sluggishness in Chicago has been a major contributor to some of the problems with on-time performance and traffic delays.
COO Oscar Munoz noted that CSX and its peers are working with officials at the Chicago terminal coordinating office to ensure they do everything they can do to make operations run as smoothly as possible. Winter traditionally brings weather-related challenges to overcome, but Munoz pointed to the spring season as the true test of whether Chicago will behave well for CSX and the other railroads.
"The big issue that has been in trucking remains the big issue in trucking, and that is driver availability. Most people that I'm aware of don't want their sons to grow up to be truck drivers." -- Gooden
Falling fuel prices make trucking cheaper, and some investors see trucking as a threat to CSX's intermodal business. But Gooden strongly disagreed, suggesting that a fundamental shift away from trucking has become permanent and isn't reliant on fuel prices. Specifically, with the barriers to entry for workers seeking to become truck drivers, including the willingness to be away from home for long periods of time and the need to get commercial licenses, Gooden thinks trucking still won't be competitive even as fuel gets cheaper. Also, government regulations seeking to improve the fuel efficiency of 18-wheelers will put further strain on trucking companies by requiring fleet updates in order to comply.
CSX addressed many of the concerns investors have, and the company clearly sees better times ahead. If the economy cooperates, then CSX could well build on its 2014 success this year and beyond.