CSX Raises Forecast as Railroads Chase Cargo Beyond Coal

CSX Corp. unexpectedly boosted its full-year profit forecast as the biggest railroad in the eastern U.S. bets on intermodal freight to help stanch declines in shipments of coal, its largest cargo.

“They’re doing the best they can to manage the changing nature of freight on their system,” Mark Levin, an analyst at BB&T Capital Markets in Richmond, Virginia, said in a Bloomberg Radio interview yesterday. “Coal is an exceedingly profitable component of their business. As intermodal grows and coal accounts for less of the overall operating earnings, that’s going to be a headwind.”

CSX’s raised forecast marks a bright spot for railroad investors as the industry searches for an antidote to slumping volumes of the fossil fuel spurred by utilities’ switch to cheaper natural gas. Union Pacific Corp., the largest U.S. railroad, gave a forecast for third-quarter earnings earlier this month that fell short of analysts’ estimates.

Shares of CSX rose 1.5 percent to $26.50 in extended trading yesterday after the Jacksonville, Florida-based company said earnings per share for 2013 will be “slightly up” from 2012. Previously, CSX had said profit would be “roughly flat.”

Shipments of cargo that can be carried by train, truck or ship rose 6 percent in the third quarter, from a year earlier, while coal slumped 7 percent, CSX said yesterday. Gains in so-called intermodal shipments helped the company post third-quarter earnings that beat analysts’ estimates.

Crude Oil

CSX also said shipments of chemicals increased 12 percent, driven by rising crude-oil volumes. While those gains aren’t enough to overcome the decline in its coal business, it signals the company is diversifying its business, Levin said.

“It’s a very small part of what CSX does, but clearly the fastest growing component,” said Levin, who has a hold rating on the company’s stock. “They are shifting, but it is a slow shift.”

Intermodal freight is CSX’s “greatest opportunity” for growth, Chief Financial Officer Fredrik Eliasson said at a meeting with analysts and investors last month.

CSX has pledged to invest $575 million on new terminals and projects to increase the share of its network that can accommodate trains carrying double-stacked containers as part of a public-private partnership called the National Gateway.

Norfolk Southern Corp., which competes to haul freight in the Eastern U.S., also has new intermodal facilities in Tennessee and Alabama.

Trucker Shortage

New federal regulations that cut the number of hours truckers can work each week while mandating longer rest periods, and a shortage of drivers are combining to make intermodal a more attractive business for railroads, Lee Klaskow, a Bloomberg Industries logistics analyst based in Skillman, New Jersey, said in a telephone interview.

“It’s showing the investments that CSX and Norfolk Southern made in their intermodal networks are starting to pay off,” Klaskow said. “Given where regulations are impacting the trucking market and the driver shortage not going anywhere, we should expect to see the trends toward growth continue in domestic intermodal.”

CSX said yesterday that net income rose 1.8 percent to $463 million, or 46 cents a share, in the third quarter ended in September, compared with a year earlier. Analysts had projected 43 cents, the average of 25 estimates according to data compiled by Bloomberg.

The company’s shares rose 0.3 percent to $26.10 at the close in New York before it reported its results, taking its gain for the year to 32 percent compared with an advance of 19 percent for the Standard & Poor’s 500 Index.

CSX is the first major U.S. railroad to report third-quarter earnings. Union Pacific is scheduled to release results tomorrow, followed by Kansas City Southern on Oct. 18 and Norfolk Southern on Oct. 23.

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