CSX Corporation Shrugs Off Steep Declines in Coal

Shares of East Coast railroad CSX hit a 52-week high today, continuing a winning streak that's included a 42% run-up over the past year. However, the stock veered off-course after hours when CSX reported a drop in coal volume for the fourth quarter. While coal might be its Achilles' heel, CSX has a proven ability to adapt in adverse conditions. It's quite nimble -- for a railroad -- and the last quarter of 2013 was no exception.

View from the top
From 20,000 feet, CSX proved resilient in the fourth quarter of 2013, turning in results that neither floored nor devastated investors, given a mediocre operating environment. On the top line, CSX reported a 5% quarter-over-quarter increase in revenue to $3 billion, which was accompanied by a 2.9% decline in earnings from $449 million to $426 million. As a result, earnings per share fell 2 cents, from $0.44 per share in the fourth quarter of 2012 to $0.42 in 2013.

For the entirety of 2013, the company netted $1.83 per share, up slightly from $1.79 in 2012. At the same time, revenue increased 2% to $12.0 billion.

The revenue and earnings-per-share figures were both in line with analysts' expectations, so there were no major surprises there. Furthermore, the tailwinds of a steady, growing economy seemed to be offset by the headwinds of the coal market, as CEO and Chairman Michael Ward alluded to in the press release: "Supported by the strength of an expanding economy, we delivered 6% volume growth in the quarter, despite another sharp decline in coal."

CSX remains one of the American railroads most heavily reliant on coal, yet a bustling economy has blunted the impact of this commodity's downturn.

3 key takeaways
For investors, it's important to take a closer look beyond the financial statements to answer three basic questions. For a railroad like CSX, what's fueling growth? Secondly, how is the engine running? And finally, what lies ahead? Let's tackle the latest quarter from this perspective and see what 2014 might look like for CSX and the rail industry as a whole.

What's fueling growth? For CSX, the intermodal and merchandise categories continue to shoulder the burden of deteriorating coal shipments. While coal volumes dipped 5% during the course of 2013, intermodal and merchandise climbed 11% and 7%, respectively.

The key drivers of such strong merchandise volume growth were agricultural and industrial chemicals, which grew 16% and 18%, respectively. Overall, these two categories -- bolstered by strong energy and auto markets -- helped lift CSX's total volume growth by 6% for the year.  

How's the engine running? To assess the efficiency of CSX's engine, we need to look at the operating ratio the company reported. The operating ratio shows the efficiency of a railroad by comparing operating expenses with sales.

In my opinion, this remains an area of particular concern. While CSX made dramatic improvements over the past decade to streamline operations and cut costs, this downward trend ceased several quarters ago. In the latest year-end results, the operating ratio increased, from 70.6 in 2012 to 71.1 in 2013. While the company claims in the press release that the railroad remains on track for a high-60s target in 2015, minimal insight is provided in how it aims to get there. Investors should pay close attention to what management has to say regarding potential cost-cutting measures in the year ahead.

What lies ahead? For insight into the future, investors will have to dive into the company's conference call. In the latest quarterly press release, CEO Michael Ward had this to say about the company's prospects: "As the economy continues to expand, CSX is well positioned to leverage that environment to create sustainable long-term value for our customers and shareholders."

Not too much in the way of specifics, although the company does foresee a "favorable outlook for majority of markets in 2014."

Foolish takeaway
In all, CSX's latest results bode well for the railroad and the industry as a whole. With the largest public carrier, Union Pacific, set to report earnings next Wednesday, investors will get a broader sense of what's in store for railroads in 2014. Union Pacific, because of its geographical position, is less reliant on coal traffic and has thus outperformed CSX in recent years. But CSX trades at a relative discount, with a price-to-earnings ratio of 15, versus 18 for Union Pacific. Still, over the long haul, both railroads appear poised to deliver for investors.