Railroads have been a casualty of the rapid change in the energy markets, with the emergence of cheap natural gas putting a huge dent in the demand for rail shipments of coal. CSX (CSX -1.10%) and Norfolk Southern (NSC -0.96%) have substantial exposure to the coal-rich Appalachian region, and coming into CSX's first-quarter financial report Tuesday, investors had expected that the company would continue to see earnings and revenue declines. CSX delivered on that front, and it sees ongoing tough times likely to last throughout 2016. Let's look more closely at the latest from CSX and what it said about the railroad's future.
CSX slows down again
CSX's first-quarter report showed the railroad's slowing momentum. Revenue fell 14% to $2.62 billion, which was even worse than the 11% projection investors had for the company's top line. Net income took a bigger hit, falling 19% from the year-ago period to $356 million and producing earnings of $0.37 per share. That matched the consensus forecast among investors.
Looking more closely at CSX's numbers reveals some familiar trends. Overall volumes fell 5%, and lower fuel-surcharge recoveries played a big part in reducing revenue. CSX also brought in $95 million less revenue from customers who failed to meet minimum volume commitments. Operating ratios continued to climb, hitting 73.1%.
On the plus side, CSX showed solid pricing gains and posted higher volumes in automotive, intermodal, minerals, and waste and equipment. Yet industrial metals posted a 18% drop, and coal volume fell by more than 30% yet again. Revenue per unit was down nearly across the board, falling 9% overall. In terms of revenue, only the automotive and waste and equipment segments managed to see modest gains, and a weak agricultural market led to a 10% drop in sales for that part of the business.
Looking at CSX's operational figures, the railroad posted mixed results. On the safety front, CSX saw a higher rate of personal injury frequency, but train accident rates were roughly flat from the year-ago quarter. Other metrics improved, including a big jump in on-time originations and arrivals. Velocities climbed above the 21-mile-per-hour mark, and delay times at key terminals also fell.
CSX CEO Michael Ward continued to focus on some of the challenges that the railroad has faced lately. "As we managed through the impact of the continued coal declines and other market forces during the first quarter," Ward said, "CSX took aggressive actions to improve efficiency, reduce costs, and streamline resources across the network."
What's ahead for CSX?
Yet the CEO still expects those measures to take time to play themselves out and result in improved financial performance. "While CSX delivered strong efficiency gains in the first quarter," Ward said, "we continue to expect full-year earnings per share to decline in 2016 as a result of ongoing coal headwinds combined with other market fundamentals." In the long run, CSX has greater aspirations, but the railroad is being realistic about the near-term challenges it faces.
That pessimism has been persistent throughout much of the railroad industry, and especially with those companies that have historically had the closest relationships with the struggling coal sector. Norfolk Southern investors had hoped that a potential takeover bid from one of its Canadian peers might result in useful consolidation that could improve industry conditions overall, but just like a similar bid for CSX, the Norfolk Southern proposal fell prey to competitive and regulatory concerns. Now, both CSX and Norfolk Southern are likely to have to find ways to succeed on their own, and that could prove difficult given the ongoing weakness in key commodity markets. Moreover, economic conditions could deteriorate in other areas, presenting new threats to other segments that CSX and its peers have been able to rely on in the absence of a healthy commodity market.
CSX Investors were nonplussed by the news, and shares moved up just a fraction of a percentage point in after-hours trading following the announcement. Without better news, CSX shares could continue to tread water throughout 2016 and even beyond.