Record quarterly revenue from CSX Corp., the largest railroad in the eastern U.S., signals a strengthening economy as companies shipped more goods, grain and domestic coal by rail.
The carrier led off industry earnings reports yesterday with a 6.5 percent revenue gain. CSX will increase capital investment this year by $100 million in a nod to what it sees as a “positive economic environment.” Analysts also project Union Pacific Corp. and Norfolk Southern Corp. to say sales rose to records as rail carloads climbed at the fastest pace since 2010.
“The big takeaway is they’re going to invest more because they’re seeing more growth and what we care about most is what’s happening in the next 12 months,” said Lee Klaskow, a Bloomberg Industries analyst, in a phone interview after the results were released.
CSX reported revenue of $3.24 billion in the second quarter. The average estimate from 20 analysts was $3.26 billion. Net income for the Jacksonville, Florida-based railroad was $529 million, or 53 cents per share, compared with $521 million, or 51 cents, a year earlier. Analysts had estimated earnings per share of 52 cents.
“With the broad-based economic momentum we are seeing, the core earning strength of this company is improving,” said Michael Ward, CSX’s chief executive officer, in a statement.
CSX said it expects earnings growth and profit-margin expansion of at least 10 percent next year.
There are other signs of growing economic strength. Retail sales in June rose 0.2 percent and increased in nine of 13 major categories, signaling broad consumer demand. May’s retail sales gain was increased to 0.5 percent from 0.3 percent, according to a Commerce Department report yesterday.
The railroad is seeking to increase train speeds and boost on-time deliveries following a systemwide traffic jam caused in part by the harsh winter weather in the first quarter. The railroad also had a $36 million real-estate gain in the year-earlier quarter that pumped up earnings.
CSX shares were little changed at $31 after the close of regular trading yesterday. They have risen 8.3 percent this year, compared with a 6.8 percent increase in the Standard & Poor’s 500 Index.
The U.S. economy likely expanded 3.3 percent in the three months ended in June, according to economists surveyed by Bloomberg, rebounding from the first quarter-on-quarter contraction since 2011. The drop was attributed mostly to heavy winter snowstorms that kept shoppers at home, shuttered businesses and gummed up transportation.
A bumper grain crop has pushed up rail cargo for CSX, which operates on about 21,000 miles of route track across 23 states east of the Mississippi River. Coal rebounded during the quarter as the harsh winter and higher natural gas prices caused more utilities to burn more coal and draw down their stockpiles to a eight-year low in March, according to U.S. Energy Department data compiled by Bloomberg.
Shipments of crude oil produced in U.S. shale fields have contributed to the increase of carloads even as accidents have raised concerns over safety of oil trains and tank cars. During the quarter, a CSX train carrying 105 tank cars with crude oil from the Bakken Region derailed in downtown Lynchburg, Virginia, catching ablaze and dumping up to 30,000 gallons of oil in the James River, according to a Transportation Department report. No one was injured.
The railroads, which usually don’t own oil tank cars, agreed in February to slow crude oil trains to 40 miles per hour from 50 mph in urban areas and install new sensors on oil routes to detect track defects. They also are urging the leasing companies and refineries that own tank cars to modify older ones and adopt higher standards for the newly built.
The railcar gains in the quarter were helped by demand that was pushed into the second quarter from cargo that didn’t move freely because of the snowstorms and pulled forward by shippers concerned over a potentially disruptive strike at the ports of Los Angeles and Long Beach, Long said.
The threat of a truckers’ strike crippling the ports has diminished after less than 1 percent of more than 12,000 short-haul drivers walked off the job. Separately, the six-year labor contract for the International Longshore & Warehouse Union and the Pacific Maritime Association at West Coast ports has expired and they are negotiating a new agreement.
“The next few months will be important in seeing how much of this strength we’ve seen in the last month was this pull-forward factor from the potential West Coast port strike,” said Long, who has an overweight rating on CSX, the equivalent of buy.