Like so many other companies in nearly every sector, railroad operator CSX Corp. (NASDAQ: CSX) took the occasion of announcing its first-quarter earnings results to withdraw its annual guidance for 2020. The coronavirus pandemic has all but brought the U.S. and global economies to a halt, as governments tell people to stay home unless there is an essential reason for going out.
Those orders ripple through the supply chain and hit transportation companies especially hard. Coal shipment volumes continue to decline faster than any other type of cargo, down 15% year over year by volume and 25% lower by revenue. The second-biggest hit came from automotive shipments, down 10% by both volume and revenue compared with the first quarter of 2019.
Overall, shipping volume was down by 1.5 million carloads (1%) year over year and revenue slipped by 5% to $2.86 billion. Revenue per carload totaled $1,886, which is 4% lower year over year.
Yet shares traded higher following the earnings release, partly due to the company’s decision to continue paying its dividend and keeping mum about any change to its share buyback program. CSX repurchased 9 million shares in the first quarter, which cost it $577 million. The company also issued a 30-year 3.8% note for $500 million on March 30.
Details From the First-Quarter Report
First-quarter net income dipped by 8% to $770 million, but the company claims its operating ratio of 58.7% is an industry record best for the first quarter. A railroad’s operating ratio is nothing more than total expenses divided by revenue. Expenses dropped by 7% in the first quarter, a higher rate than the 5% dip in revenue.
Earnings per share came in at $1.00, down from $1.02 in the year-ago quarter but better than the Wall Street analysts’ consensus estimate of $0.94.
The company reported that merchandise shipments, including oil, rose by 2% to 673,000 carloads in the first quarter, and revenue from those shipments increased by 3% to $1.9 billion. Revenue from coal shipments dropped 25% to $405 million and intermodal (containers) revenue slipped 1% to $422 million on 660,000 units.
CSX Still Trails Its Peers
In 2019, CSX had the poorest performance among the U.S. railroad stocks. Of the four U.S.-based, independent freight haulers, all but CSX performed better than the S&P 500 in 2019. Norfolk Southern Corp. (NYSE: NSC) stock added just over 30% last year, Union Pacific Corp. (NYSE: UNP) added 34.3% and Kansas City Southern (NYSE: KSU) gained a whopping 62%. CSX posted an annual gain of just under 17.7%, well short of the S&P 500’s rise of around 29% and the Dow Jones transportation index’s 19% gain.
For the 15 and a half months since January 2019, CSX stock trades down about 0.3%, while Kansas Southern stock trades up more than 37%, Union Pacific trades more than 9% higher and Norfolk Southern is up more than 5%. CSX’s stock price took a nasty hit last July, following a poor second-quarter earnings report, due to the impact of tariffs on imported goods from China.
Looking Ahead at Demand for Rail Transportation
The coronavirus impact has probably only begun to be felt among the transportation services providers. Container shipments to the Port of Los Angeles were down by around 25% in March, and April could be worse. Ships that are arriving at U.S. ports are unloading their goods into warehouses because retailers can’t sell them in closed stores. Shipping fell by an estimated 15% in the first three months of the year and could drop by as much as 30% in the next few months.
Retailers are even asking makers of refrigerators and washing machines to hold deliveries. According to International Chamber of Shipping Chair Esben Poulsson, inventories of apparel, textiles and white goods are full.
With no cargo to move from U.S. ports to U.S. retailers, rail freight transportation is bound to suffer. For the week ended April 18, intermodal volume was down 19.1% compared with the same week in 2019, according to the American Association of Railroads. For the year to date, intermodal rail volume is down 10.4%.
The largest volume decline comes in automobiles and parts. Last week, volume in this category was down 88.2% and year-to-date volume was down 22.4%. The year-to-date decline in automobile shipments is even greater than the decline in coal shipments, which are down 20.1%.
Total carload volume was down 27.5% last week and is down 9.5% for the year to date. Bernstein analyst David Vernon said in a research note, “We do not expect that volumes will improve before the economy re-opens, and we have little clarity on when that will be.”
The Analysts’ Estimates for CSX
For the second quarter of 2020, the consensus earnings estimate is $0.91 per share, on revenues of $2.68 billion. In the second quarter of last year, CSX posted EPS of $1.08 and revenues of $2.98 billion. The EPS estimate is almost 16% lower for the current quarter, and the revenue estimate is 10% lower.
For the full year, analysts estimate EPS at $3.62 on revenues of $10.85 billion, a decrease of about 13% in EPS and 9.1% in revenues.
Meeting those expectations is likely to depend on how well CSX controls expenses. In the first quarter, the company cut labor and benefit expenses by $66 million as a result of an average of 1,567 fewer employees. Incentive compensation declined by $14 million and other labor-related costs dropped by $10 million. Fuel expenses declined by $41 million thanks to 8.3 million fewer gallons of fuel required and per-gallon costs that were lower by $0.24.
It’s certainly a stretch to say that CSX’s results depend altogether on a return to some sort of normalcy in the U.S. economy. A better conclusion might be to keep an eye out for how CSX is setting itself up for the time when the economy starts coming back. Reducing expenses and conserving cash to remain liquid without having to borrow would be good starting points.