5 Things CSX Corporation Just Told Investors
Earnings season is supposed to be when companies get to focus on their business performance over the past quarter. But for CSX , speculation about takeover talk from Canadian Pacific led many investors to spend less time looking at CSX's third-quarter results. Nevertheless, CEO Michael Ward and his team of executives remain laser-focused on improving the railroad's efficiency -- and only made some oblique comments about any potential consolidation in the industry. Let's take a look at five choice comments from CSX's conference call.
CSX continues to see growth potential across the market. ... These results demonstrate CSX's ability to capitalize on the continued economic momentum that is driving broad-based growth across nearly all markets coupled with the secular growth trends in intermodal and the oil and gas markets.
-- CEO Michael Ward
CSX's third-quarter results continued to set new records for the railroad. Third-quarter revenue came in at $3.2 billion, which was 8% higher than last year as freight volumes jumped by 7%. Moreover, CSX squeezed even more profit from its sales, seeing an even larger 13% jump in earnings per share from year-ago levels.
At the same time that CSX has produced these record results, the company has also maintained its efforts to keep costs down. By seeing its operating ratio fall below 70%, CSX has demonstrated its success in giving investors the results they need to see.
The underlying macroeconomy remains strong and the data and our experience suggest a positive outlook for growth. ... [M]any of the customers we serve grew at a robust pace, and most of the key indicators we track point to continued expansion.
-- Chief Marketing Officer Clarence Gooden
Macroeconomic conditions have a huge impact on the railroad industry, and in order to maximize its success, CSX has to see a healthy economy. Specifically, Gooden pointed to a powerful combination of factors that could drive shipping volume going forward. First, expansion in the manufacturing economy points to higher demand for products generally. Yet, equally important, substantial drops in the amount of inventory that customers are keeping on hand show that those customers will need even more products in the near future. By positioning itself to deliver those much-needed products, CSX has the opportunity to grow even more quickly in the months to come if Gooden's economic forecasts pan out.
Looking forward, we expect a positive demand environment in the fourth quarter, with stable to favorable conditions for 96% of our markets and unfavorable conditions for the remaining 4%.
With such a diverse set of markets to serve, it's rare for so much of CSX's business areas to be in sync with one another. Yet CSX has taken advantage of demand from oil and gas producers to transport chemicals, and automotive and energy markets have driven the metals segment. CSX sees intermodal growth continuing, and even the domestic coal segment is seen recovering as utilities start to buy more coal again to replenish depleted inventories. With neutral expectations for forest products and the automotive sector, CSX's only sore spot will likely come from coal exports.
In the third quarter, the personal injury and train accident rates both increased versus last year's near-record lows.
-- Chief Operating Officer Oscar Munoz
Railroad safety has come back into the spotlight after a number of high-profile derailments across the industry. As more railroads ship crude oil, regulators are looking closely at the possible need to impose restrictions on trains transporting that oil to market.
Obviously, CSX remains focused on ensuring that accidents happen as infrequently as possible, and Munoz pointed out that CSX remains "a leader in the nation's safest industry and ... committed to both community and employee safety." That might not be enough to convince regulators to steer clear, but it's still an important key to CSX's future.
You might actually see a step back. As you know, in past mergers, there have been severe service disruptors after one of those transactions.
CSX executives didn't address any direct questions about the potential for a merger with Canadian Pacific. But Ward hasn't minced words about his belief that CSX can do quite well on its own. When asked a question about whether consolidation will improve capacity across the North American network, Ward answered that he believes the opposite could well be true. With CSX having finished several projects to help improve conditions in the key Chicago area, the company thinks it can take any necessary steps to maximize efficiency without the need to join forces -- at least on some other company's terms.
CSX stock popped after the news of Canadian Pacific's interest, and it's still possible that the railroad will remain in play. But with CSX looking so favorable on its own, shareholders don't need a merger in order to feel confident about the railroad's future prospects.
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