15 Jul

Rail Traffic Volume Could Hurt CSX and Its Peers in Q2

WRITTEN BY Anirudha Bhagat

Second-quarter expectations

On Tuesday, CSX (CSX) is scheduled to report its second-quarter earnings results after the market closes. Analysts expect the company’s earnings growth rate to slowdown more in the second quarter. Analysts expect the company to report an adjusted EPS of $1.11, which shows a YoY (year-over-year) increase of 9.4%.

Rail Traffic Volume Could Hurt CSX and Its Peers in Q2

The second-quarter earnings growth expectations are much lower than the approximately 31% increase CSX registered in the first quarter. The expectations are significantly lower than CSX’s more than 50% YoY increase recorded in all four quarters in 2018.

Why is CSX’s earnings growth slowing down?

Analysts expect lower revenue growth to hurt CSX’s bottom-line results. They expect the company to report revenues of $3.14 billion, which is a YoY increase of 1.2%. The second-quarter revenue growth expectation is much lower than 4.8% growth recorded in the first quarter. CSX reported double-digit top-line growth in the last two quarters of 2018.

Sluggish revenue growth expectations are mainly due to dismal rail traffic volumes during the quarter. On July 3, CSX reported a 4% YoY decline in the second-quarter rail traffic. A 10.3% YoY fall in intermodal volumes more than offset the benefit of a 1% rise in carload volumes.

For the US, ongoing trade disputes with China and European countries led to a decline in the second-quarter rail traffic volume. Floods across several North American regions and cheap natural gas prices might have contributed to the lower volume.

Will CSX’s operating ratio improve?

Despite sluggish revenue growth, CSX’s bottom-line results will likely benefit from its cost-saving initiatives. The company implemented the PSR (Precision Scheduled Railroading) system to reduce network complexity and improve operational efficiency.

CSX’s improving operating ratio reflects that the PSR system is already working. The ratio is calculated by dividing the operating expenses by the total revenues. A lower rate is better for the company. In the first quarter, CSX’s operating ratio fell by 420 basis points YoY to 59.5%.

Peers’ expectations

CSX’s peers are expected to report sluggish top-line and bottom-line growth due to weak volumes in the second quarter. In the last quarter, Union Pacific’s (UNP) rail traffic volume fell 4% YoY, while Norfolk Southern (NSC) registered a 3.8% YoY decline.

Union Pacific’s second-quarter revenues will likely fall ~1% YoY. The company reported high-single-digit growth in all four quarters of 2018. The EPS is expected to increase 8.2% YoY compared to over 30% growth recorded in all four quarters of 2018. Norfolk Southern will likely report top-line and bottom-line growth of 1.8% and 11.6%, respectively. In the first quarter, the company’s revenues and EPS rose 4.5% and 30%, respectively.

Kansas City Southern (KSU) is projected to report 3.5% YoY revenue growth. The growth expectation is lower than the mid-single-digit increase in the previous three quarters. Kansas City Southern’s earnings are expected to increase 4.6%—significantly lower than the high-double-digit rise in the previous four quarters.

CSX’s stock performance

So far, CSX stock has made a remarkable run this year. Despite sluggish top-line growth expectations, investors seemed confident about CSX’s ability to deliver impressive bottom-line results. Shareholders’ friendly moves, cost-cutting initiatives, and the improved operating ratio drove the stock higher.

With a YTD (year-to-date) return of 26.5%, CSX has outperformed the broader market. The Dow Jones and the S&P 500 have gained 17.2% and 20.2%, respectively. The stock has also outpaced the iShares Transportation Average ETF’s (IYT) returns, which has risen ~16% YTD. About 54% of IYT’s portfolio consists of ground freight and logistics stocks.

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