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Stock Analyst Update

New CSX Management Passes First Test

The improvement in the wide-moat railroad's operating ratio is impressive.


 CSX (CSX) improved its first-quarter operating ratio impressively. Its operating metrics look poised to outperform other large railroads this period, in sharp contrast to its struggles with routing delays and customer service disappointments as it rolled out a scheduled railroading plan beginning second quarter last year. One quarter does not make a trend, but it’s typical for the first to be the most margin-challenged due to harsh weather, and the 63.7% operating ratio bodes well for fulfilling the 60% by 2020 target the firm recently staked out. In the prior-year period, CSX’s normalized OR was 69.4%. We maintain our wide moat rating and expect as we update our valuation model any update will be upward and quite modest.

We admit it has been a brief test, but management CSX put in place following former CEO Hunter Harrison’s December death has been effective. CSX improved train velocity, terminal car dwell, and train length compared with the previous four quarters. Capital expenditure declined 17% from the prior-year period, and management indicates it has ample capacity before elevated investment is needed. In fact, CEO Jim Foote indicated it would take a monumental increase in demand to cause CSX to hire more employees; it has a substantial 800 locomotives in storage.

Volume isn’t particularly rosy, with carloads either flat or down in all major commodity classes, for a total 4% drop year over year, but revenue ton-miles declined just 1%. Pricing helped, as excluding coal, rates improved “slightly" sequentially, and year-over-year revenue per carload was up 4% (a portion due to greater fuel surcharges).

Resulting revenue was flat year over year, but the operational improvement is evident. Compared with last year, the rail is profitably handling 1% fewer revenue ton-miles with eight fewer hump yards, 12% fewer total employees, 20,000 fewer rail cars, and 1,000 fewer locomotives. Expenses were held to 8% lower than a year ago, excluding prior-year restructuring.

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Keith Schoonmaker does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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