With quarterly operating income of more than $1 billion, an operating ratio of 66.8%, and net earnings of $553 million, CSX posted record financial results for the second quarter of 2015.
Though revenue declined 6% as pricing gains were more than offset by the impact of lower fuel recovery, a 1% volume decline and a changing business mix, continued low fuel prices and savings from “efficiency initiatives” reduced CSX’s expenses by 9%. As a result, CSX posted record quarterly operating income of $1.01 billion, a record-low operating ratio of 66.8%, and net earnings of $553 million, or an all-time record $0.56 per share, an increase from $529 million, or $0.53 per share, in the second quarter of 2014.
“While we saw challenges in a number of markets, CSX employees delivered an even safer, more reliable and more differentiated service product this quarter,” said Chairman and CEO Michael J. Ward. “We expect the momentum in network performance we saw in the second quarter to accelerate, continuing to create value for our customers and shareholders.”
CSX said it “expects to deliver mid-to-high single digit earnings per share growth for 2015, although the upper end of that range has become more challenging given the current energy environment. With low natural gas prices and high inventory levels continuing to reduce utility coal demand, we now expect domestic coal volume to decline by approximately 10% for 2015, and the outlook for export coal volume remains approximately 30 million tons for the year. We also expect meaningful margin expansion as we progress toward a full-year operating ratio in the mid-60s, longer term.”
“Investors reacted fairly positively to CSX’s earnings, likely interpreting the results as demonstrative of the industry’s ability to maintain pricing power and boost productivity in the face of challenging volumes,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Coal is likely to remain weak in 2015, and further downside cannot be ruled out for next year, but this will depend on variables like natural gas prices and currency.
“CSX beat our and consensus expectations for operating income and EPS, as productivity measures and better-than-expected pricing more than offset a light top line impacted by a volume decline and lower fuel surcharges. While the company added some caution to its guidance, noting that the high end of the previously announced 2015 EPS growth rate of mid-to-high single digits has become more challenging to achieve in light of the current energy environment, the new guidance commentary was still fairly positive relative to our expectation at the time of the earnings release of 3% growth and the street’s 4% forecast.
“Management’s decreased confidence in the high end of the guidance range is primarily attributable to continued weakness in key commodities, chiefly coal, but also metals, forest products, phosphate and fertilizer, and waste, which are expected to have an unfavorable outlook, at least in 3Q15 (total volumes should decline slightly in 3Q15, vs. our forecast at the time of the earnings call of a 4% decline). CSX now expects 2015 domestic coal volume to be down 10% (on the 1Q15 earnings call, the company had noted the commodity should be down at least 5% in 2015).
“CSX is making good progress right-sizing its network through various efforts, including the Variable Train initiative put in place a few months ago, and the company is likely to furlough some employees and park equipment in coming months barring an unexpected rise in volumes. CSX is still targeting $200 million of productivity gains for the full year ($45 million in 2Q15).
“On the pricing front, the carrier was able to deliver on its efforts to accelerate price increases. All-in core pricing and merchandise-and-intermodal pricing [increases] were 3.5% and 3.9%, respectively, in 2Q15, following 2.0% and 3.4%, respectively, in 1Q15, and 0.7% and 2.7% in 4Q14. We note that CSX’s 3.9% non-coal pricing in 2Q15 is largely consistent with the 4.0% pricing result on our 2Q15 Rail Shipper Survey, which has very limited to no participation from coal shippers.
“We are raising our 2015 and 2016 EPS estimates to $2.03 and $2.35, from $2.00 and $2.30, respectively, in order to reflect the 2Q15 beat and slightly better outlook than we had anticipated. Our $35 price target is based on our new 2016 earnings forecast and the same 15x multiple. We maintain our Market Perform rating as valuation is less than compelling, with the shares trading at 14.0x our 2016 earnings forecast, largely in line with the group average, and due to coal uncertainty. However, the stock may be attractive to patient, long-term investors.”