Ordinarily, when a company announces record operating income and internal efficiency, you can expect shareholders to celebrate. Yet for railroad giant CSX (NASDAQ:CSX), the company's second-quarter financial report last month only started a cascade that has sent the railroad stock to its lowest levels in a year, as many investors didn't foresee some of the second-order impacts of falling energy prices on CSX's mix of business.
Despite its optimism, CSX faces many of the same difficulties as its railroad peers, and it will take a lot of work to overcome all of them. Let's take a closer look at what CSX said last month, and whether it's on track to recover from its troubles.
CSX's bottom line is still chugging along
CSX posted mixed results for the second quarter of 2015, with sales weakness outweighed by growing net income. Revenue fell 6%, to $3.06 billion, as the company saw a greater decrease than the 4% drop that most investors were expecting to see. Yet declining expenses helped produce record operating income, and a 5% rise in net income to $553 million worked out to earnings of $0.56 per share, hitting a new record and outpacing the consensus forecast by $0.03 per share.
CSX blamed a combination of factors for the poor sales performance. Cheaper fuel helped the bottom line, but it also hit revenue because CSX didn't collect as much in fuel surcharges as it did in the year-ago quarter. Overall, volumes declined 1%, and CSX said that its mix of business shifted toward less favorable lines, hurting sales. On the net income front, efficiency-related savings and low energy costs contributed toward a 9% decline in expenses, and CSX's operating ratio fell to a record low 66.8%.
CSX's various segments showed unusually uniform performance, with revenue from every single merchandise category falling or holding steady. In terms of volume, automotive, minerals, and waste and equipment led the gainers, but a huge drop in metals and fertilizer shipments held back overall results. A 5% gain in intermodal volume wasn't enough to offset coal's 11% volume decline, and revenue per unit transported suffered substantial weakness in nearly every category.
CSX made substantial progress on the operational front, seeing improvement in on-time originations and arrivals, as well as faster train speeds and less delay time along the way. Accident rates and personal-injury frequency reflected greater safety, as CSX's efforts on the risk-management front appear to be paying off.
Can CSX keep speeding up?
CSX CEO Michael Ward was generally enthusiastic about the railroad's performance. "While we saw challenges in a number of markets," Ward said, "we expect the momentum in network performance we saw in the second quarter to accelerate."
In particular, CSX gave updated guidance for the full 2015 year that suggests slow, but steady, progress in a tough environment. The railroad now believes that it will grow earnings per share by a mid- to high single-digit percentage for the year, although the weak energy industry has made it less likely that CSX will reach the upper end of its range.
CSX also said that coal consumption domestically will likely fall by about 10%, as cheap natural gas continues to drive utility demand toward the cleaner-burning fuel, and away from coal. Coal exports also will remain at previous forecasts. Nevertheless, the railroad looks forward to sustaining its record-low operating ratios and the resulting boost in profit margins that its efforts will generate in the long run.
One thing to bear in mind is that coal's drop has led to its becoming less of an influence on CSX's results, albeit while still having a major role. In 2010, coal made up nearly a third of CSX's overall revenue and a quarter of total volume. Now, CSX gets about a fifth of its sales from coal, and coal-shipment volume represented just a sixth of its total transport. Given just how badly coal has fared, the railroad industry has to think that the negative impact from lagging coal operations will hit rock-bottom soon.
Despite CSX's enthusiasm, shareholders remain pessimistic, with the stock having lost nearly 10% of its value since the company's report. Until the railroad figures out how to take advantage of lower fuel costs by boosting volumes from other parts of the industry, energy's negative influence could continue to weigh on CSX and its railroad peers well into the future.