CSX prepares to meet long-term coal decline head on

US freight rail operator CSX will need to report solid results next month if it aims to convince investors that it is on track to deliver in 2016. Its stock, up 3.7% so far this year, has struggled to rally but remains relatively attractive thanks to a forward yield hovering around 2.8%.

Difficult trading conditions persist, yet a conservative payout ratio might reassure income investors. That said, management is faced with soft markets and structural headwinds that are likely to put pressure on comparable revenues, earnings and cash flow figures.

In this context, although the first-quarter figures reported earlier in April were soft, they could have been far worse.

First quarter earnings stood at $356m, or $0.37 per share on a fully diluted basis, down 18% from $442m, or $0.45 per share, one year earlier, when its total share count was 3% higher at 992m. Based on a lower number of shares outstanding, dividends per share (DPS) rose to $0.18 in the first quarter from $0.16 year-on-year.

Excluding stock buybacks, EPS would have dropped 20% year-on-year, while DPS would have been 2.6% below last year’s levels.

Earnings are expected to fall by much as 12% this year, based on consensus estimates of $1.76 for EPS, which currently implies a forward price-to-earnings ratio of 15x based on a share price of $25.7.

DPS is expected to rise 5% this year, which would be a meaningful growth rate given the amount of debt sitting on its balance sheet, and with underlying earnings that are more likely to fall than to rise. EBIT fell 16% to $704m in the first quarter, while interest expenses rose 6.7% to $143m from $134m, but that surge was more than offset by a 20% drop in tax-related expenses.

Its poor performance at operating and net income level came in the wake of falling revenues, which declined 14% to $2.6bn, a drop that was only partly offset by a 12% fall in costs year-on-year.

CSX is carefully managing its costs base, with falling fuel costs – down 44% year-on-year – also providing a helping hand. Labour and materials costs were also on their way down, by 9% and 12%, respectively.

While the outlook does not look overly optimistic, managing expectations remains key. The company said earlier this year that it delivered strong efficiency gains in the period, but it continues to expect full-year earnings per share to decline this year “as a result of ongoing coal headwinds combined with other market fundamentals”.

The “impact of the continued coal decline and other market forces” had an impact on trading in the first quarter and is expected to continue this quarter and beyond.

Source: Transport Intelligence, June 21, 2016

Author: Alessandro Pasetti