The railroad industry entered 2016 with substantial uncertainty, as weakness in the energy markets has threatened key sources of demand and hurt shipping volumes in essential areas such as coal. Coming into its fourth-quarter financial report Tuesday, CSX (NASDAQ:CSX) had its investors prepared for slightly weaker results than it posted this time last year, and for the most part, the railroad company's financials reflected what most had expected to see. Nevertheless, going forward, CSX thinks it can compete against Union Pacific (NYSE:UNP) and other railroads by focusing on efficiency and pricing to restructure itself into a leaner, more profitable company. Let's take a closer look at how CSX fared last quarter and what it expects for 2016 and beyond.
No more records for CSX
CSX has had a habit of setting records lately, but it wasn't able to build on its impressive track record in the fourth quarter of 2015. Revenue fell 13% to $2.78 billion, which was even worse than the roughly 10% drop that investors had expected to see. On the bottom line, though, CSX managed to exceed expectations, as net earnings dropped just 5% to $466 million. That worked out to earnings of $0.48 per share, $0.02 better than the consensus forecast even though it was down a penny from year-ago levels.
A closer look at the latest numbers from CSX shows continued headwinds that the railroad has had to face. Like Union Pacific has seen, lower recoveries from customer fuel surcharges were primarily responsible for the drop in revenue, even as stronger pricing gains helped to offset the hit. Volume overall fell 6%, and CSX had to deal with changes in its business mix that affected its ability to bring in sales. Fortunately, expenses matched the 13% decline in revenue, helping to preserve gross margins and improve the company's operating ratio to 71.6%.
As we've seen in past quarters, CSX's biggest headache has come from its commodity-related businesses. Coal volumes fell 32% during the quarter, leading to a nearly 40% drop in revenue for the segment and capping a terrible year. Industrial metals also took a hit, with volume down 23%. The automotive sector had the biggest gains in volume, but pricing issues there also led to a slight drop in dollar revenue. For the full year, most of CSX's key segments posted declines, and commodities led the way downward with coal sales falling 19% and metals down 15%.
Even CSX's operations posed a few problems during the quarter. Train velocities continued to improve, as did the ability to get trains moved through key terminals. Yet personal-injury frequencies climbed 25% from the year-ago quarter, and accident rates rose 16%, eating into many of the gains that CSX has made on the safety front during 2015.
Can CSX make 2016 a better year?
CSX CEO Michael Ward painted a mixed picture for the railroad. On one hand, he praised 2015's results, noting how CSX "balanced strong service with compelling cost control and efficiency gains despite a market challenged by low commodity prices and global impacts of the strong U.S. dollar." Yet looking forward, Ward said that earnings would likely be down in 2016, pointing to "negative global and industrial market trends projected for 2016." CSX will keep trying to be more efficient, but it's unclear how much more the railroad can squeeze from its internal efforts.
The long-term success of CSX, Union Pacific, and other railroads will rely on their ability to adapt to changing conditions. For instance, even as coal took a big hit due to slumping natural gas prices in past years, both CSX and Union Pacific were able to take advantage of huge growth in oil production in hard-to-reach areas like the Bakken shale play in North Dakota. Now that oil has followed suit, the railroads need to be prepared for other markets to pick up the slack. Some believe that the slump in agricultural commodities could reverse itself in 2016, and that could give Union Pacific and CSX alike some opportunities to make up for weaker performance elsewhere.
For now, though, investors weren't willing to have faith in CSX's future prospects, sending the stock down 2% in after-market trading following the announcement and hitting new three-year lows. Until markets like energy start showing signs of hitting bottom, CSX could have trouble seeing its shares rebound for very long.