Zacks_Analysts' Blog : Record Year at CSX Despite 4Q Miss - Analyst Blog

CSX Corporation (CSX) reported fourth quarter 2011 earnings of 43 cents per share, missing the Zacks Consensus Estimate by a penny, but coming in 13.2% higher than the year-ago level of 38 cents. The year-over-year increase was based on higher pricing, which offset lackluster shipments and increasing costs. For the full year, earnings per share grew to a record 24% year over year to $1.67.

Fourth quarter revenue of $2.9 billion also lagged the Zacks Consensus Estimate of $3 billion but grew 5% year over year on higher freight rates as well as fuel surcharges, offsetting a 4% decline in volumes.  Revenue for the year grew 10% year over year to $11.7 billion. 

Operating income inched down 1% in the fourth quarter to $841 million due to higher operating ratio (defined as operating expenses as a percentage of revenue), which deteriorated 150 basis points (bps) year over year to 71.5%.

Operating income in fiscal 2011 increased 11% year over year to $3.1 billion as operating ratio improved 20 bps. Fuel costs were up 22% and 38%, respectively, in the fourth quarter and full year 2011.

Performance Across Business Lines

Merchandise revenue increased 5% year over year to $2.4 billion in the reported quarter, primarily driven by higher freight rates and fuel recoveries, which more than mitigated lackluster shipments. Volumes for this segment dipped 1% due to a respective 8% and 7% decline in agricultural products and chemicals. Agricultural volumes plunged due to reduced feed shipments arising from lower poultry and pork production coupled with higher corn prices. Chemical volumes, on the other hand, were impacted by weaker demand for raw material used in manufacturing plastics. Forest Products’ volume registered a 1% decline given weakness in housing construction-related markets, partly offset by strong shipments of pulp board and packaging paper. Automotive volume grew 4% due to higher North American automotive production. Metals volume registered a strong 8% year-over-year increase on higher shipments of sheet steel for domestic auto production and higher scrap shipments attributable to increased export demand and higher domestic steel production.

Coal revenue saw a year-over-year increase of 6% in the fourth quarter given higher rates and fuel price recoveries. Volumes declined 8% year-over-year due to lower utility coal shipments as a result of low natural gas prices and a stockpile that was above the normal level. This volume decline was partially compensated by higher export demand for U.S. coal in international markets like Europe, Asia and South America.  

Intermodal revenue saw an annual increase of 7% given higher fuel surcharges. Volumes declined 5% year over year owing to softness in international intermodal shipments on weaker peak season demand. However, domestic volumes remained strong on the back of continued market share gains resulting from the on-going truckload conversions to rail intermodal services.   

Liquidity Position

The company exited 2011 with cash and cash equivalents of $783 million compared with $1.2 billion in the year-ago period. Long-term debt increased to $7.6 billion from $7.1 billion. The company reported cash from operations of $3.4 billion compared to $3.2 billion in fiscal 2010.

Our Analysis

CSX Corp. reported solid year-over-year growth in the fourth quarter supported primarily by higher value of rail freight demand. The pricing improvement highlights the growing market demand for rail-based freight transportation services and higher fuel surcharges that offset higher costs and steeply rising fuel prices. We expect the company to further focus on growth with increased profitability across most of its products lines, particularly in intermodal and coal markets. Higher profitability will further support investments to meet the growing demand in the transportation sector. Additionally, we expect the company to emphasize on better pricing to allow fuel cost recovery.

However, we remain cautious about the stock due to the company’s capital intensive nature and unionized workforce, increased competition as well as strict railroad regulation. The company’s primary rail competitor is Norfolk Southern Corp. (NSC), which operates across the length and breadth of CSXCorp.’s territory.

Consequently, we are currently maintaining our long-term Neutral recommendation on CSX Corp. For the short-term (1-3 months), the stock has a Zacks #3 Rank (Hold).