Railroad shipping: CSX kicks off 2Q earnings season with a solid performance

The rebound in market conditions for the freight railroad industry—due to an improving economy—is evident based on second quarter earnings results for Class I railroad carrier CSX.

Following a first quarter in which the Jacksonville, Florida-based company reported solid earnings at $306 million and $0.78 per share, which was a 22 percent annual gain, the second quarter more than doubled that output. Second quarter earnings were $414 million—or $1.07 per share—a 51 percent year-over-year improvement, which beat the Wall Street estimate of $0.98 per share. 

CSX added that quarterly revenue was up 22 percent year-over-year to $2.663 billion, with revenue growth and continued operating leverage hitting record high levels for the company in the form of an operating income of $768 million—a 33 percent annual increase—and an operating ratio of 71.2 percent.

Like the first quarter, volumes in the second quarter were very strong for CSX at 1,598 million units for a 13 percent annual gain. Automotive loadings continued their strong momentum with a 63 percent increase, and metals were up 44 percent. Total merchandise was up 14 percent with 659,000 units, with coal (401,000 units) up 7 percent—marking a significant improvement from the first quarter and the first quarter of year-over-year growth since the fourth quarter of 2008—and intermodal (538,000 units) up 18 percent.

“These [quarterly] results were driven largely by volume improvement, a recovering marketplace, the ability to value-price our services, and overall safety, service, and productivity on our railroad,” said Michael J. Ward, CSX President and CEO on an earnings call this morning. “We took on higher levels of traffic profitably as our employees continued to find new ways to operate more efficiently. We are on the right path in creating value for our customers to help them compete in today’s economy…[and] we remain confident in our ability to grow, drive operating leverage, and produce strong operating results going forward.”

And Clarence Gooden, CSX executive vice president, sales and marketing said on the call that the manufacturing strength as evidenced by the Institute of Supply Management’s manufacturing index showing growth for the 11th straight month, coupled with inventory replenishment, continue to play a significant role in the economic recovery and CSX’ quarterly performance. This was reflected, he said, with inventory levels remaining below target levels in several markets.

Gooden also noted that along with volume growth the strong revenue performance in the second quarter could also be attributed to core pricing gains and the impact of higher fuel costs reflected in the CSX fuel surcharge program. CSX’ fuel expense increased $119 in the second quarter, due to higher prices and volume.

Looking ahead, Gooden said market conditions look favorable for CSX throughout the remainder of 2010.

“The macroeconomic recovery which began in late 2009 is expected to continue throughout this year,” said Gooden. “U.S. industrial production is expected to grow in excess of 3 percent in the second half of 2010. The outlook for third quarter volume and revenue is favorable, as linehaul revenue growth is expected across nearly all markets, including coal. Our network is well-positioned to handle volume growth, as we have handled these high volumes in the past.”

Avondale Partners analyst Donald Broughton wrote in a research note that CSX continues to benefit from a significant improvement in volumes as well as diligent cost containment, reinforcing his firm’s belief that CSX is a much better-run company than it was in the last cycle.