CSX Corporation (CSX) is set to report quarterly earnings after hours. Analysts expect revenue of $2.76 billion and EPS of $0.43. The revenue estimate implies a 9% decline sequentially and a 5% increase Y/Y. Investors should focus on the following key items.
Will Coal Continue Its Hot Streak?
Declining rail traffic defined the economy last year. Rail traffic has been on a tear through the first quarter of 2017, and coal has led the way. Rail traffic is up 6% for the first 14 weeks of the year. For the week ending April 8, total rail traffic was up 7%, and coal and grain were up 29% and 26%, respectively. That bodes well for CSX which receives about 14% of its rail volume from coal.
In Q4 CSX’s total volume and revenue rose Y/Y by 5% and 9%, respectively – the first time revenue rose in several quarters. The biggest driver of results was coal, which saw volume and revenue soar 8% and 23%, respectively. This was a sea change from the year-earlier period when coal revenue fell 37%.
CSX was able to capitalize on China’s curtailment of new coal-fired plants, which helped tamp down coal supply and lift prices. Domestically, utilities continue to burn through inflated stockpiles. Each of the company’s five product categories realized revenue increases. However, as coal goes, so goes CSX. I expect another strong performance this quarter.
Will A Bloodbath Ensue Under Hunter Harrison?
After Hunter Harrison was named CSX’s new CEO in March, the most important question is, “will a bloodbath ensue?” With a 67% operating ratio and 45% EBITDA margin I never felt CSX needed a management change. The company improved its EBITDA margins from 40% in the year-earlier period in spite of its previous coal headwinds. The reason I suspect more bloodletting is because CSX already laid off 1,000 managers in advance of Harrison coming on board. Secondly, Harrison brandished his reputation as a cost-cutter as former CEO of Canadian Pacific (CP). Lastly, CSX’s market capitalization has risen over $9 billion since Harrison was named CEO. How else could Harrison justify his value-add than by cutting costs?
