CSX Earnings: Soft Retail End Markets and Wage Inflation Persist, but Outlook Stable

Eastern Class I railroad CSX’s third-quarter revenue declined 8% year over year on persistent intermodal weakness, easing accessorial income, unfavorable mix, and lower fuel surcharges. Revenue missed our forecast slightly on greater-than-anticipated intermodal volume declines. We note that core carload pricing remains positive.

Total yield fell 6% year over year (including lower coal benchmark rates and fuel), while consolidated volume was down 2% on sluggish international intermodal trends. Intermodal activity (down 7%) and rates are facing minimal retailer restocking and excess capacity in the competing truckload sector. Carload volumes (excluding intermodal) rose 2%, driven by new business wins, strong export coal, infrastructure tailwinds for metals and minerals, and solid automotive restocking activity, albeit recent UAW strikes will probably start tempering auto carloads. Negatives in the quarter were tough comps for grain, soft forest products (weak housing market), and lower chemicals shipments (sluggish industrial end markets) though chemicals appear to be stabilizing.

CSX’s adjusted operating ratio (expenses/revenue excluding Virginia real estate gains) deteriorated 540 basis points year over year to 63.7%, worse than our expected run rate. OR deterioration stems from lower intermodal revenue and significant wage and benefit inflation from the new union contracts. We also suspect net fuel costs increased on fuel surcharge lag.

Uncertainty is elevated, but as with the other Class I railroads, we look for OR improvement to return in 2024, assuming intermodal recovers modestly, and with help from pricing gains as CSX looks to push through the impact of wage hikes to shippers.

Overall, we will be tempering our 2023 top line and margin forecasts, but we don’t expect to drastically alter our DCF-derived $32 per share fair value estimate. The shares are appropriately valued relative to our long-term free cash flow growth assumptions.