Ask The Experts: August 28, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: How did CSX perform in Q2/19?
A:
CSX actually had a strong quarter despite the headwinds, outperforming the industry on the merchandise side (the PSR sweet spot), with most of the volume issues either strategic (de-marketing some intermodal) or simply cyclical/political (and thus not secular). So let’s quickly look at the CSX Q2/19 results:

  • Volume declined 4% units (-3% RTMs) – and revenue declined 1% despite the mix hit coming from the 7% YOY drop in export coal.

    • The Philadelphia refinery that exploded accounts for 1% of CSX usual annual volumes.

    • However, within merchandise 5/7 commodities were up, and overall merchandise/car-load volumes were up 1% for the quarter – that’s actually a singular achievement in this environment.

    • Intermodal was down worse that I expected (volumes down 10%, revenues down 11%) but, remember, they planned to shed 7-8% of the business this year after shedding 7% last year – beginning in the fall, so lapping the de-marketing period at the end of this quarter will provide an optical boost; Foote said IM still enjoyed a 15-20% price gap to truck (which, along with JBHT earnings, should have been a healthy rejoinder to those that question intermodal’s future value proposition); in fact, CMO Mark Wallace said the secular growth rate for domestic intermodal might no longer be double-digit but was still GDP +2-300 bps; more time on the future of intermodal at CSX, the competitive challenges from truck and from rail (NSC), etc could have – and should have been spent. We’re getting to the point where another investor conference might be (is) warranted….

  • Yet earnings were up 7% YOY (consensus called for +10% but likely didn’t take into effect the export coal decline, inevitable, but early); CSX. CEO Foote noted it could still improve the OR by a point a year even with down volumes – and revenues….It is true that real estate gains were significant (1—bps in OR) but in this stage of CSX PSR transformation, it would be unfair to call that “unusual”….

  • Capitulate, not reiterate - And there it was….my thoughts when Foote took down FY19 guidance from a revenue growth rate of 1-2% to a decline of a similar amount, without (above) any change in their OR guidance. Foote essentially said he almost felt compelled; he was bound by the SEC to do this – but remember its all volume-related – and that the biggest issue is the confusion stemming from “puzzling” mixed signals. Yes, it really wasn’t the direction (up or down), it was the uncertainty. Once it is clear that a recession has been reached (or not), CSX can quickly bring down variable costs accordingly (or not). This is, in fact, a historic railroad strong point; the key is how much of a lag is need to ascertain the actual economic trend. And for now, neither CSX nor their customers are forecasting a recession….

But the bottom line here was that despite the headwinds the OR improved by 120bps to an amazing 57.4% - crew starts were down 5%, more then the traffic decline, equipment rents were lower, etc.

  • Operating metrics improved YOY, if not sequentially – velocity by 14% and dwell by 6%.

  • O/T originations (88% and arrivals (still only 53%) followed a similar pattern.

  • Safety showed remarkable improvement (P/I by 22% and train accidents by fully 54%).

Q: What were the reasons behind Canadian Pacific’s (CP) high numbers in Q2?
A:
Canadian traffic was up for the quarter, US volumes down, for one thing, and their PSR journeys are several life cycles ahead, for another. But, in the scheme of things, given expectations of overall market (S&P 500) earnings being flat to down and against tough YOY comparisons, the consensus expectations of +6% EPS, aided by buybacks to be sure, seems pretty good (and will, as with CP, prove low by some 50%). Transportation analysts have been crying poor and cutting numbers all spring and summer, so far (FDX didn’t help) – but the rails, the only good performing transport sector, continue to outperform the broader markets (YTD S&P500 +19%, rails +~30-35% ex-GWR). That is not to say the volume trends (~--3% for the quarter but -5% in June) aren’t troubling – they are….

Click Here to learn more about Tony Hatch and ABH Consulting.

Alison Babcock