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CSX Earnings Preview: Weak Coal Volumes, Fuel Surcharge Revenue To Weigh On Results

CSX, the railroad operator in it's second quarter result is expected to report flat earnings, as weakness across most commodities carloads and declining fuel surcharge revenues weigh in on its top line. CSX’s carload report for the quarter to date ending June 28 reveals that its total carload traffic, which includes intermodal volumes, declined 1% year-on-year. CSX will also be suffering due to a difficult comparison with the previous year’s second quarter, which benefited from a carryover of first quarter volumes.

In the previous quarter, the railroad operator’s revenue was relatively stagnant at $3.03 billion due to sluggish volumes and weak revenue per unit. However, net earnings increased 11% driven by solid improvements in its operating ratio (operating expenses expressed as a percentage of revenue) as a result of low fuel prices. Earnings per share increased 13%, to reach $0.45, slightly higher than consensus estimates of $0.44.

Coal To Present Headwinds

The demand for coal at U.S. electric utilities has declined through the first half of 2015, as the spot price for natural gas remained lower than $3 per million btu, a level at which utilities generally start moving away from coal. This is also evident from the rise in natural gas consumption at electric utilities, which grew 25% year-on-year in April, while coal consumption declined 11% year-on-year, leading to a 30% rise in coal stock piles.

On the export front, U.S. coal has been suffering from weak metallurgical and thermal coal prices in the global market. Coal prices have slumped due to high exports from Australian coal suppliers and low demand from China. The strong U.S. dollar has also presented headwinds. U.S. coal suppliers have either had to lower their prices in order to remain competitive or have stopped exporting. This has led to steep declines in railroads’ export coal carloads.

These trends have led to a decline in CSX’s coal carloads. According to its carload report for the quarter to date ending June 28, coal carloads declined 14% year-on-year. Not only will the decline in carloads impact the railroad operator’s top line but also its coal revenue per unit, primarily due to a lower mix of export coal.

CSX May See Lower Fuel Price Decline Benefits

CSX’s fuel surcharge revenues have been suffering due to the sharp decline in fuel prices. Despite a 2% increase in its first quarter 2015 pricing, CSX reported flat revenue per carload due to an $89 million decline in fuel surcharge. However, the declining fuel prices led to a net positive benefit for CSX in the first quarter. This is because fuel surcharge is based on two month lagged values of highway diesel prices, while fuel expenses are based on spot prices. Since fuel prices were declining continuously, spot prices were lower than prices two months back, leading to lower fuel expenses than fuel surcharge revenues.

Presently, the price of U.S. on-highway diesel fuel has been fluctuating around its lows, as crude oil prices have showed some upwards momentum. In the second week of April, the average price of U.S. on-highway diesel fuel declined to a low of $2.75.However, it climbed to $2.91 by the fourth week of May. Thereafter, the U.S. on-highway diesel fuel price has continued to gradually decline, ending the fourth week of June with an average price of $2.84.

This situation does not bode well for CSX, since fuel expenses are likely to be in line with fuel surcharge revenues, despite the two month lag. As a result, CSX might witness only a slight positive impact from the fluctuations in fuel price in the second quarter, which would impact its operating ratio.

source: http://www.forbes.com