Can CSX Put a Tough 2015 Behind It?

Image: CSX.

The railroad industry had a horrible 2015, as plunging commodities prices ate into key sources of revenue for the railroads that transport those commodities across the nation. CSX (CSX +0.59%) in particular has suffered greatly from the decline in coal use, as cheaper natural gas has spurred many utility customers to make the transition to the cleaner-burning fuel for use in electrical power generation plants. Yet even as CSX and peer Norfolk Southern (NSC +0.91%) deal with the challenges of falling coal demand, the question the entire industry has to face is whether it can continue to find new sources of growth if the economic growth over the past several years for the U.S. economy comes to an abrupt halt. In its fourth-quarter earnings release next week, CSX will likely report that 2015 ended on a tough note operationally, but investors hope that outlooks for 2016 will be more favorable. Let's take an early look at what shareholders should expect from CSX's financial report.

Stats on CSX

Source: Yahoo! Finance.

How will CSX earnings fare?
Investors have had to tone down their hopes for a turnaround in CSX earnings over the past few months, cutting their fourth-quarter estimates by 8% and making similar downward adjustments to their full-year 2016 projections. The stock has suffered lately, falling another 15% just since early October.

CSX's third-quarter results showed just how low expectations have gotten for the railroad giant. Revenue dropped 9% and net income inched down from year-ago levels, but the fact that the company was able to boost earnings per share by a single penny was enough to please investors who were bracing for a year-over-year drop. Coal volume dropped 18%, sending revenue from the segment down 19%. Other commodity-related areas, including fertilizer products and metals, also posted double-digit percentage drops in sales and volume measures. An uptick in mineral shipments helped cushion the blow somewhat, but for the most part, CSX's fundamentals continued to look troubling as investors tried to call a bottom for the transportation sector.

One factor that has hurt CSX's top line has also helped it operationally. Falling fuel prices mean that CSX can't charge customers as much in fuel surcharges, and that directly affects revenue figures. Yet cheaper fuel costs also have made CSX more efficient in cutting overall expenses. Although fuel prices have continued to fall recently, the steepest year-over-year drops have already taken place, and so future sales declines should be less extreme than investors will see in the coming quarter.

Both CSX and Norfolk Southern have historically had substantial exposure to the coal industry, and so the biggest question they'll have to answer is whether they can replace lost revenue from coal with other types of business. CSX has remained upbeat about its prospects in that regard, despite its own expectations for a more than 10% drop in domestic coal volumes for 2015 and continued weakness into 2016. By emphasizing operational efficiency and using its pricing power to squeeze more profits from more successful business segments, CSX thinks that it will be able to continue growing its earnings per share. With the stock trading at less than 12 times earnings, even modest earnings growth could be enough to drive future interest in the stock.

When CSX reports, investors should look beyond the railroad's results to see how it plans to execute a full turnaround strategy going forward. With Norfolk Southern and other competitors working hard to find ways to stand out from the railroad crowd, CSX must remain vigilant to keep up, all the while supporting its long-term safety record and protecting its core customer base. Even in an uncertain macroeconomic climate, CSX will continue to play a vital role in the U.S. transportation network in 2016 and beyond.