Anyone who has read much of my posts over the last year or so knows that I like railroad stocks. The industry gives investors a great way to keep up with multiple areas of the economy. The companies themselves seem poised to grow earnings as the economy recovers as well. I’ve made the argument that Union Pacific Corporation (NYSE:UNP) is the leader in the industry, but up until recently I’ve considered CSX Corporation (NYSE:CSX) and Norfolk Southern Corp. (NYSE:NSC) to be nearly interchangeable. However, CSX’s last earnings report is causing me to rethink this comparison. The company has several problems that aren’t easy to fix, and it’s becoming apparent that these challenges are here to stay.
An Economic Forecast In An Earnings Report
CSX Corporation (CSX) is a stock I’ve followed for many years. My family has multiple generations that have worked for the railroad, and I’ve often used CSX’s earnings reports as a cheat sheet to see how different industries are doing. Railroads transport both raw materials and finished goods. There is a good chance that volume growth in a particular industry is tied to better performance in the future for that industry’s main players.
For instance, the fact that CSX saw a 15% volume increase in their automotive shipments should be good news for companies like Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM). Since Union Pacific saw a 14% increase in automotive volumes, and Norfolk Southern said automotive volumes were up, this is a huge tip that there is strong demand for vehicles. On the flip side, the fact that coal volumes were down 18% at CSX, 23% at Norfolk Southern, and 7% at Union Pacific, can’t be good news for investors in the coal industry. If you want to know what’s happening with the economy, pick up a railroad earnings report. However, this information is freely available to anyone, and not a good enough reason to buy shares.
Like A Domino Effect
CSX has three issues that are built upon one another. The first issue is the company is too reliant on coal shipments, which is leading to cash flow challenges. In fact, CSX’s percentage of coal volumes is higher than either of their main competitors. Coal volumes represented 25.90% of CSX’s total shipments, versus 24.48% at Norfolk Southern and 20.08% at Union Pacific. The 18% decline in coal shipments thus hurts CSX more than their competition. Though the company’s EPS was flat, their operating cash flow declined over 15% on a year-over-year basis. Compared to a 5.02% decline at Norfolk Southern, and a 4.9% increase at Union Pacific, this problem almost jumps off the page.