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5 Things CSX Management Wants You to Know

By Dan Caplinger - Sep 9, 2015 at 4:40PM

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The railroad company is still struggling to work through the problems in the coal industry.

Source: CSX.

The railroad industry has gone through a big transformation in recent years, and CSX (CSX 0.94%), in particular, has had to navigate huge changes in the fundamentals of the energy markets. With CSX having traditionally had substantial ties to the coal industry, the shift from coal to natural gas and oil has led to a shifting mix of business for the railroad. Even with changing dynamics within the transportation sector, CEO Michael Ward and his management team all believe that CSX has every chance of outperforming its competitors. Let's take a closer look at some of the things CSX management has highlighted as big opportunities going forward.

"We continue to focus on the actions that are foundational to our long-term success. ... We are pursuing new opportunities across our diverse portfolio and further improving network performance for consumers and producers throughout the global supply chain."-- CEO Michael Ward

CSX hasn't been shy about talking about its challenges, especially given the headwinds that the railroad is suffering from the big declines in domestic coal shipments and its impact on CSX's overall business. Yet CSX has worked hard to try to beef up its presence in other key transportation areas, and in the most recent quarter, the railroad saw increased volume in several niches, including automotive shipments and intermodal transport.

In order to respond to changing market conditions, CSX has focused on initiatives that can help the company irrespective of the current business environment. By improving efficiency, cutting unnecessary costs, and working at bolstering safety, Ward thinks that CSX can build a competitive advantage over its peers and ensure solid long-term performance.

"Looking at full-year 2015 earnings, we are still targeting mid- to high single-digit EPS growth. However, given the current energy environment, achieving the upper end of that range will clearly be challenging."-- CFO Fredrik Eliasson

As 2015 has progressed, CSX has had to rein in high early expectations, which initially called for double-digit percentage growth this year. Unfortunately, cheaper fuel costs have been offset by lower fuel surcharges as well as adverse impacts to earnings elsewhere, and as Eliasson noted, weakness in energy has led to declines in transport of raw materials like fracking sand and chemicals to producers as well as produced energy products coming out of those fields. CSX hopes to improve its operating ratios to squeeze as much profit as possible from its revenue, but it'll be a tall order to generate the full amount of growth that CSX investors would have preferred to see.

"There's already a little bit of pressure on the crude movement just because of the current spread between Bakken and Brent."-- Ward

The energy boom gave railroads a shot in the arm as remote shale-producing areas didn't have pipelines to ship oil and gas and therefore needed rail-based options instead. Yet as price differentials between Bakken and Brent crude have narrowed, users on the East Coast have had greater incentive to import oil rather than accept Bakken crude by rail, and that has led to lower shipping volumes for CSX.

The big question is whether low energy prices have spurred greater growth elsewhere in the economy. Paying less at the pump gives people more discretionary income, and that in turn can produce greater shipping demand. In the long run, CSX hopes that those factors will even out and allow the railroad simply to shift its business mix rather than costing it revenue outright.

"There's always been a small gap between the arrivals and the originations, and we have seen both measures improve as we've worked to restore our service level. ... The key for us is to focus on how late the average train is, and that is a metric we've seen substantial improvement over the last several months." -- Former President Oscar Munoz

For a long time, the rise in demand for rail transportation has led to some traffic challenges, especially at certain points in the industry rail network. Yet CSX and its peers have worked hard to adapt to changing conditions, and Munoz told investors that rising network velocity has led to a substantial drop in lateness both in leaving origination points and in arriving at their eventual destinations. Munoz sees even further improvement ahead, and even though originations have a head-start in improving faster than arrivals, CSX hopes that those two figures will even out in the near future.

"The [coal] stockpiles in both the North and the South are higher than normal, so there's some inventory hang. We still expect that the gas prices will be relatively low. ... [T]here could be a possibility that the utilities' consumption of coal in our area would be slightly less than it is this year."-- President Clarence Gooden

Unfortunately, coal shows few signs of turning around, and that will continue to put pressure on CSX's overall results. Over time, CSX has seen coal represent an ever-decreasing portion of its overall business, but even so, coal makes up about 20% of the railroad's revenue and about a sixth of its total volume comes from coal shipments. If utilities expect lower demand for coal, then CSX will likely feel the hit both for the remainder of this year and perhaps even into 2016.

CSX has worked hard to get through a tough environment. Even though the railroad still has farther to go, CSX looks like it remains on track to achieve its long-term goals and remain a profitable growth candidate for the future.

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