Image: CSX.

Railroads have taken it on the chin lately, with the advantages of lower fuel costs proving insufficient to offset the negative aspects of falling energy prices on its shipping volumes. Coming into its third-quarter financial report Tuesday afternoon, CSX (NASDAQ:CSX) had already seen substantial declines in revenue as a result of poor prospects for coal and other energy-related transportation volumes, and investors were prepared for even more pain ahead. In that light, the railroad's results were surprisingly strong, even though CSX did give some dour guidance about the future of the coal industry and CSX's role in it. Let's look more closely at CSX's most recent report to see what direction the company could be headed in the years ahead.

CSX posts record earnings per share
At first glance, CSX's results looked less than stellar. Revenue fell 9% to $2.94 billion, which was even worse than the 7.5% decline in sales that most investors were looking to see. Net income inched downward at a slower pace, though, falling less than a percent to $507 million. Thanks to a drop in the number of shares outstanding, CSX's earnings per share actually rose by a penny to $0.52, defying expectations for a penny-per-share drop.

Looking more closely at CSX's numbers, you can see several crosscurrents that the railroad experienced. Lower fuel recoveries from customer surcharges hit CSX's top line, and despite the positive impact of rate increases, volume declined by 3% from the year-ago quarter. CSX also said once again that its mix of business was less profitable than in the past. What saved CSX's earnings was an 11% drop in expenses. Low fuel prices helped, but cost-control strategies also played a vital part, as efficiency initiatives paid off to produce a record low operating ratio for the third quarter of 68.3%.

Most of CSX's weakness was concentrated in a handful of business segments. Coal volumes dropped 18%, with a consequent 19% drop in revenue associated with the segment. Fertilizer products, metals, and waste and equipment also posted double-digit volume and revenue declines, while only the minerals and intermodal segments managed to eke out volume increases for the quarter.

Operationally, CSX continued to see improvements in most areas. Personal injury frequency declined 21%, and on-time origination and arrival figures jumped by double-digit percentages. Train velocities climbed slightly and delay times fell. An 8% drop in total revenue ton-miles played a role in helping CSX run more smoothly, but the company has also worked hard to try to boost its overall operational efficiency.

What CSX sees around the corner
CSX CEO Michael Ward touted the company's record results. As he noted, "Our performance supports strong pricing and continued efficiency gains as we continue to drive value for customers and shareholders," and Ward also believs that the company's ability to boost service levels and control costs is a big positive in a competitive environment.

Some bad news on the railroad's coal business threw some cold water on CSX's results. The company said that it now expects domestic coal volumes to fall by more than the 10% previously predicted, with low natural gas prices and high inventory levels persisting longer than originally expected. Moreover, CSX now believes that coal's woes will continue into 2016, and even though it left its estimate for coal export volumes unchanged, the lack of strong domestic demand will play a substantial role in holding back what is a shrinking but still important overall source of revenue for CSX.

Even with coal's woes, though, CSX still thinks it can post mid-single-digit percentage growth in earnings per share this year, as wider profit margins will play a key role in its overall future prospects. The company's long-term goal is to have operating efficiency ratios that are only slightly lower than they are now, and that shows just how much progress CSX has made in the past couple of years.

Investors were generally pleased with CSX's earnings surprise, as shares climbed more than 1% in the first hour of after-market trading following the announcement. Even with coal's ongoing troubles, CSX's efforts to cut costs should pay off in the long run, especially when shipping volumes and revenue start moving back in the right direction.