October 17, 2018
From Apology Tour to Victory Lap in One Year – maybe that’s pushing it; but like a playoff team up (earnings growth; OR improvement; service improvement) by a few games, they can start sourcing parade permits….
Got moves like Rickey (Henderson)! CSX is becoming a legendary lead-off hitter – and we should’ve seen this coming….well, of course, we did, but perhaps not to this extent….CSX reported a(nother) blow-out quarter, doubling EPS YOY (actually up fully 105%, aided a bit even lower than low tax rate and the lumpy real estate sales coming up, er, trumps) and blowing through optimistic consensus numbers by 13% while still declaring it was “early innings” in their PSR/PHH transformation. Not to dwell on one stat, but their OR improved by nine-hundred-and-seventy-basis-points to 58.7%. Such success, not unexpectedly, led to questions about their 2020 target (60% OR) being….”conservative”). Speaking of stats, one unfortunate PSR attribute is the lack of quarterly detail – six (6) slides. They did highlight safety improvements (personal injury rate by 43% YOY; train accident rate by 28%) as well as operational/service metric enhancements (velocity increased by 28% and terminal dwell decreased by 26%). The hurricane impact was 2 cents/ps this year – and last year (will it be an annual event?).
New Kid in Town: The sales/marketing performance was the key to the earnings outperformance – volumes increased by 4%, in line with the industry overall, and given their service achievements, a fair result - but revenues grew by 14%. I was expecting new CMO Mark Wallace, after three months of “re-establishing better relationships with (CSX) shippers (classic PHH), to take an official bow, but CEO Jim Foote led the scripted part; Mark took the brunt of the Q&A. We know the pricing environment was – remains- good (held back at CSX only by a mysterious contract let a year ago in intermodal). Speaking of intermodal, the reorganization continues in pursuit of moving IM from the back of the pack in terms of contribution to the middle/front. For the quarter, the 3% unit growth will look poor compared to what NSC will report but comes during a reorganization that shed 7% of the hub & spoke volume and shorter haul volume (with another 7% to go, it seems). CSX is officially re-purposing the North West Ohio (former) terminal to “regional demand point” from hub, adding BNSF overhead service, expanded capacity to the Port of NYNJ, and partnering with NorthPoint Development to create a logistics park.
In demand: More than just IM: Coal tonnage was actually up 6% (domestic down 2% but export up, still, by 22%). That last bit prompted questions on whether high-margin export coal is the key to the reported margin/yield improvement; CSX deflected. If export coal, always hard to predict, shows the long-anticipated slowdown, Foote said CSX will “pivot and adjust like any good PSR railroad”. Indeed. Overall, volume was strong across the board – 8/9 categories were up (fertilizer’s decline was due to a plant closing, also last year). CSX says its gaining share in merchandise business – we’ll compare notes after NSC. “Other revenue” was up $56mm – reflecting still high demurrage (etc) charges, as incentives to change shipper behavior have taken longer than management expected to take root.
A few nuggets:
Capex was….be still my heart….increased by $100mm to $1.7B for this year – some is hurricane damage repair; some is pulling forward PTC spend – but some portion is unnamed “high return projects”
Full year 2018 revenue guidance was raised form “mid single digit range” to 6-8%; clearly, as they stated “2018 is ahead of the plan (as outlined on the March 1 Investor Conference)”.
Anthony B. Hatch