How CSX Can Restart Its Earnings Growth Engine
CSX will release its quarterly report next Tuesday, and investors have already prepared for a slight reduction in the company's net income from a year ago. But even as the railroad industry has had to deal with the big drop in domestic demand for commodities like coal and iron ore, it has found ways to replace lost revenue and hold its own against unfavorable trends, and that's a big part of why CSX earnings have held up as well as they have.
CSX in particular faces the challenge of being concentrated in the eastern part of the U.S., which has historically relied more on coal shipments and which doesn't have the access to West Coast export capacity that some of its competitors have. Yet the company has managed to overcome that challenge with the help of some innovative strategies. Let's take an early look at what's been happening with CSX over the past quarter and what we're likely to see in its quarterly report.
Stats on CSX
Analyst EPS Estimate
Change From Year-Ago EPS
Change From Year-Ago Revenue
Earnings Beats in Past Four Quarters
Source: Yahoo! Finance.
Will CSX earnings pick up steam this quarter?
Analysts have modestly dropped their views on CSX's earnings prospects over the past few months, cutting a penny per share from their estimates for both the June quarter and the full 2013 year. The stock has largely stayed stable, rising about 3% since early April.
CSX started the quarter off right, reporting record earnings in the first quarter despite posting roughly flat revenue. That was much better than the slight declines in sales and profits that investors had expected, and it came even though CSX reported coal volumes that were down 10%.
But CSX has recognized the potential of moving important commodities like crops and oil from the center of the country to the East Coast. The success that Union Pacific has had in transporting oil across the country has inspired plenty of copycat moves from its railroad rivals as they all seek to make up for lost revenue elsewhere. For its part, CSX expects to spend $2.3 billion on infrastructure improvements like higher bridges, larger tunnels, and improving clearance to allow for double-decker-container transport to ports on the Atlantic coast. Kansas City Southern is also trying to capitalize on this trend, with its own plans to spend half a billion dollars on capital expenditures this year.
Moreover, coal hasn't been a complete bust for CSX. Both CSX and peer Norfolk Southern have exposure to the coal-rich Appalachian region, and they've found emerging markets like China and India are still willing to ship coal halfway around the world as a cheaper alternative to limited supplies of oil and natural gas. Even domestically, extremely low natural-gas prices have been the primary driver of the move away from coal, and as gas prices return to more typical levels, the relative costs of dealing with side effects of coal use like pollution will encourage greater coal consumption.
When CSX reports earnings, watch for the company to discuss the status of its capex program and whether those improvements are starting to pay off in higher profits. In the long run, those investments will be essential for the railroad company to grow faster.
Oil isn't just having a positive impact on railroad stocks. get the latest on some intriguing energy plays by checking out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.
Click here to add CSX to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article How CSX Can Restart Its Earnings Growth Engine originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.