CSX Corp. (CSX) rose the most since April 2009, leading gains among U.S. railroads, after predicting record first-quarter earnings because of increased demand for container and merchandise shipments.
That freight is helping blunt a drop of as much as 30 percent in domestic utility coal cargos, CSX said today in a website presentation. Total carloads climbed 1 percent through the week ended March 9, Jacksonville, Florida-based CSX said.
It’s “only the utility business that is not doing well, and that is becoming increasingly a very small piece of our overall business,” Chief Financial Officer Fredrik Eliasson said at a JPMorgan Chase & Co. conference in New York. “Despite the utility coal being down 25 percent to 30 percent during the first quarter, we’re going to have the record first quarter.”
CSX also expects record full-year earnings, Eliasson said, without giving specifics for either period. The average estimates in Bloomberg analyst surveys were for profit of 38 cents a share in the first quarter and $1.81 for all of 2012.
The stock climbed 8.5 percent to $21.92 at the close in New York, the biggest increase in the Standard & Poor’s 500 Index (SPX) and in the three-carrier S&P 500 Railroads Index. It was the biggest jump since April 2009.
Rising demand for automotive, metal and housing-related goods is helping make up for CSX’s coal decline, which is due to a milder winter and lower natural gas prices that prompted utilities to switch fuel sources. While falling coal volumes have sparked investor concern that profit growth will slow, the commodity is only about 15 percent of CSX’s business.
Eliasson also reaffirmed CSX’s goal for a 65 percent operating ratio, a measure of operating expenses over sales, by 2015, though he said it will be “more difficult” to reach that target with utility coal volumes dwindling.
“At some point utility coal has to stabilize and clearly we’re expecting that,” he said. “As long as we’re executing on the things that we’re seeing that we can control around pricing, productivity, volume growth in the other markets, we still think we can get there.”
Norfolk Southern, CSX’s rival in the eastern U.S., said a 17 percent decline in utility coal carloads through March 10 is mostly from milder weather rather than natural-gas switching. Those shipments may improve with warm spring weather, which is “not all that implausible right now,” Chief Financial Officer James Squires said at the same conference.
Investors appear to be “pricing in” an unrealistically bad earnings outlook for U.S railroads, Justin Yagerman, a New York-based analyst with Deutsche Bank, said in a note to clients yesterday.
“Although rails face coal and ag headwinds, they should benefit from solid core pricing gains, merchandise traffic growth, and market share gains in intermodal,” Yagerman wrote. He recommends buying CSX and has a hold rating on Norfolk, Virginia-based Norfolk Southern.
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