On Wednesday, CSX (CSX) stock was trading 7% lower in the pre-market trade. The company reported dismal second-quarter results. CSX slashed the outlook for fiscal 2019. Investors are cautious about the company’s growth prospects, which triggered a sell-off in the stock. CSX reported an EPS of $1.08, which fell short of analysts’ estimates of $1.11. The company’s YoY (year-over-year) bottom-line growth rate slowed down to 6.9% in the second quarter.
In the second quarter, the earnings growth rate is much lower than the approximate 31% increase CSX registered in the first quarter. The earnings growth rate is also significantly lower than CSX’s more than 50% YoY increase in all four quarters in 2018.
What hurt CSX’s earnings?
CSX’s sluggish earnings growth was mainly due to its dismal top-line performance. The company’s second-quarter revenues fell 1% YoY to $3.06 billion from $3.10 billion in the second quarter of 2018. The quarterly revenues also fell short of analysts’ expectations of $3.14 billion.
The YoY decrease was mainly due to a 4% fall in the overall volume. The decrease was partially offset by a 3% rise in the revenue per unit. A 10% decline in intermodal volumes mainly led to the YoY fall in the overall rail traffic during the quarter. CSX recorded a 1% YoY increase in the carload traffic.
CSX reported a YoY decline in its revenues for the first time in the past five quarters. For the US, ongoing trade disputes with European countries and China led to a decrease in the second-quarter rail traffic volumes. Flooding across several North American regions and cheap natural gas prices might have contributed to the lower volume.
CSX slashed its revenue outlook for fiscal 2019 due to continued intermodal volume weakness. The company expects its 2019 revenues to fall 1%–2% YoY. At the beginning of the year, the company expected 1%–2% YoY growth in its top line.
Operating ratio improved
Despite the dismal top-line performance, CSX’s bottom-line results benefited from cost-saving initiatives. Adopting the PSR (Precision Scheduled Railroading) system helped the company reduce expenses and improve its operational efficiency. CSX contained labor expenses and fuel costs during the quarter, which lowered its operating costs. Labor costs and fuel expenses fell 3% and 13% YoY in the second quarter.
CSX’s expenses fell 3% to $1.76 billion in the second quarter compared to the second quarter of 2018. The company’s operating ratio improved due to lower costs. CSX’s operating ratio fell by 120 basis points YoY to 57.4%—a record level for the second quarter. The ratio shows the operating expenses as a percentage of revenues. A lower rate is better for a company.
CSX’s president and CEO, James M. Foote, said, “I am extremely proud of our dedicated CSX employees for once again achieving new record levels of efficiency this quarter, while also driving a significant improvement in safety.” He said, “These results reflect the strength of our operating model, and combined with continued improvements in our best-in-class customer service, represent significant progress toward our goal of being the best-run railroad in North America.”
CSX’s peers are also expected to report sluggish top-line growth in the second quarter due to weak volumes. In the last quarter, Norfolk Southern’s (NSC) rail traffic volume fell 3.8% YoY, while Union Pacific (UNP) registered a 4% YoY decline.
Analysts expect Union Pacific’s second-quarter revenues to fall ~1% YoY—compared to the high-single-digit growth it registered in all four quarters of 2018. Analysts’ revenue estimates for Norfolk Southern depict YoY growth of 1.8%. The growth expectation is significantly lower than the 4.5% YoY increase Norfolk Southern recorded in the first quarter. Analysts expect Kansas City Southern’s (KSU) revenue growth to slow down to 3.5% in the second quarter compared to the mid-single-digit increase in the previous three quarters.
With a YTD (year-to-date) return of 28%, CSX has outperformed the broader market. The Dow Jones and the S&P 500 have gained 17.2% and 19.8%, respectively. The stock has also outpaced the iShares Transportation Average ETF’s (IYT) returns, which has risen 17.7% YTD. IYT has allocated about 54% of its funds towards ground freight and logistics stocks.