CSX Earnings: Intermodal Still Struggling, but Merchandise Volume Holding Up

Eastern Class I railroad CSX’s CSX second-quarter top line trend flipped negative, falling 3% year over year on lower intermodal container volumes, easing accessorial income, and falling fuel surcharges. Revenue came in shy of our forecast due to greater-than-anticipated deterioration in intermodal activity, though merchandise volumes were in line. CSX’ operating ratio worsened, but largely met our expected run rate.

Yields were flat year over year (including lower coal benchmark rates and fuel), while total volume fell 3% due mostly to 10% lower intermodal volumes. Intermodal continues to face retailer inventory destocking and loose capacity in the competing truckload sector, though it sounds like domestic container activity is stabilizing. This more than offset 3% merchandise carload volume growth rooted in network service gains (hiring progress), higher automotive shipments (recovering vehicle production), and metals and minerals growth (construction and infrastructure strength). We think that’s a decent showing considering otherwise sluggish U.S. industrial production. Also, coal carloads grew thanks to solid export activity, only partly offset by lower domestic utility volumes.

CSX’s adjusted operating ratio (expenses/revenue excluding Virginia real estate gains) deteriorated 140 basis points to 59.9%, but was mostly in line with our forecast run rate. Lower profitability is not a surprise and stems from lost leverage from lower revenue, material wage inflation from the new union contract, and general cost inflation, partly offset by supportive underling core pricing and materially improved network productivity and velocity.

Overall, we do not expect to materially alter our DCF-derived $32 per share fair value estimate. In our view, the shares are appropriately valued relative to our long-term free cash flow growth forecasts.