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CSX Corporation (CSX), Union Pacific Corporation (UNP), Kansas City Southern (KSU): This Railroad Company Is Chugging Along Nicely

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Railroad company CSX Corporation (NYSE:CSX) has done very well this year, with its stock gaining around 27% year to date. Its recent second-quarter results were also robust, trumping consensus estimates. The company has delivered a string of solid performances over the past four quarters, but will it be able to continue the same going forward? Let’s take a brief look at its performance in the quarter, then analyze the prospects.

A good performance

Merchandise revenue, which includes shipments of agricultural, industrial, and housing & construction products, jumped 4% year over year. Growth in revenue from train-to-truck (intermodal) transport, along with merchandising gains, helped the company to offset declines from coal.

CSX Corporation (NYSE:CSX)’s revenue came in at $3.07 billion, slightly higher than the year-ago quarter’s revenue of $3.01 billion. It beat consensus estimates of $3.02 billion, fueled by higher volumes and favorable rail industry pricing, combined with improvements in operating efficiency and services.

Operating income increased 2%, helping the company earn $0.52 per share, exceeding the consensus estimate of $0.47 per share. This was also better than the year-ago earnings per share of $0.49.

Chugging ahead

Industrial (31%) and coal (25%) are the company’s two major segments. Cheaper natural gas has led to a decline in the coal business, with erstwhile users of coal switching to natural gas because of its lower cost. Coal might perform better in the future, however; a recent report suggests that natural gas could lose market share to coal as the latter becomes relatively cheaper. A resurgent demand for coal could spell better times for CSX Corporation (NYSE:CSX).

The coal inventory pile up at utilities happened mostly throughout 2012. This is already coming down in 2013 (as shown in the two graphs below) as a result of shift from natural gas to coal as fuel.

Source: eia

Going forward, one can expect increases in volumes and revenue from coal transportation. In the long term, the eastern railroads should also benefit from longer haul lengths as supply is sourced beyond Appalachia.

Acquisitions and mergers are also part of the company’s expansion and diversification plans. CSX Corporation (NYSE:CSX) recently announced the purchase of the Eastern Associated Terminal in Tampa, FL, from the Ingram Barge Company. The capacity of combined terminals allows for fast and scalable expansion, and a capacity for an additional 1 million export tons.

In 2008, CSX Corporation (NYSE:CSX) embarked upon an ambitious $850 million “National Gateway” infrastructure initiative aimed at improving its freight transport between the Mid-Atlantic ports and the Midwest. It is expected that this will bring down transportation costs, increase haul lengths, and allow CSX to better compete with its rivals.

This project is slated for completion in 2015 and is expected to provide a substantial boost to intermodal volumes. These network improvements should allow the eastern railroads to gain some market share from their western peers.

CSX should also benefit from the woes of the trucking industry. Increases in fuel prices, a shortage of long-haul drivers, and highway congestion are the industry’s biggest headwinds. This creates the perfect environment for railroads to gain market share, as shippers start opting for rail transport over trucking to cut down on transportation costs.

CSX also aims to bring down its operating ratio to the high 60s by 2015, and subsequently move further down to the mid-60s in the long term. This target seems achievable, given that many infrastructure initiatives are slated for completion in 2015. The company hopes that greater efficiency will help it meet the challenges posed by a sluggish economy and a volatile coal market.

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