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CSX: Cost Initiatives, Lower Taxes Could Drive Its Q4 Earnings

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Fourth-quarter expectations

CSX (CSX) is scheduled to report its fourth-quarter results on January 16. The US railroad company has an impressive record of beating analysts’ earnings estimates. The company beat analysts’ consensus estimates in all of the preceding four quarters with an average positive surprise of ~15%.

CSX could continue its trend of reporting better-than-expected bottom-line results and witness strong double-digit quarterly earnings growth in the fourth quarter. CSX registered over 50% earnings growth in all of the preceding three quarters in 2018. For the fourth quarter, analysts expect an adjusted EPS of $0.99 for CSX, which implies a rise of ~55% YoY (year-over-year).

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Driving factors

Analysts expect higher revenues and implementing the PSR (Precision Scheduled Railroading) system to drive CSX’s fourth-quarter earnings higher. The reduced tax rate and lower outstanding shares could help the bottom-line results.

For the fourth quarter, the company expects to report revenues of $3.13 billion—9.3% higher than the same quarter the previous year. Strong single-digit revenue growth will likely be driven by higher volumes and increased pricing. According to rail traffic data released by the company on January 2, CSX carried 3% higher railcars during the fourth quarter—compared to the same quarter the previous year. Carload and intermodal units have seen their traffic increase 3.5% and 2.3% YoY.

The PSR principle helps railroad companies reduce network complexity and improve operational efficiency. Therefore, the implementation will likely reduce CSX’s operating expenses and improve the operating ratio (operating expenses as a percentage of revenues). During the third quarter, the company’s operating ratio improved to 58.7% from 68.4% in the same quarter the previous year.

In the fourth quarter, the tax rate is projected to fall to 24.6% from 34.1% in the fourth-quarter of 2017 due to the enactment of the Tax Cuts and Jobs Act. Analysts expect the company’s aggressive share buyback program to bring down the number of outstanding shares to ~840 million from 896 million in the same quarter the previous year.

Fiscal 2018 expectations

For fiscal 2018, analysts expect the EPS to grow 66% YoY to $3.82 due to higher revenues, improved operating efficiency, lower taxes, and reduced share counts. The revenues in fiscal 2018 will likely increase 7.2% YoY to $12.2 billion.

Major US railroads (IYT) including Union Pacific (UNP), Norfolk Southern (NSC), and Kansas City Southern’s (KSU) 2018 EPS will likely increase 35.6%, 40%, 13.7%, respectively, on a YoY basis.

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