A Mixed Quarter For CSX Isn’t The Story To Focus On
Rail-carrier CSX Corporation (NASDAQ:CSX) reported a mixed quarter on Wednesday but that headline doesn’t tell the true story. The company is at the heart of a massive rebound in transportation that has several quarters to play out if it ends that quickly.
Retailers and manufacturers of virtually all types are reporting double-digit declines in YOY inventories that point to one thing and one thing only; we’re on the verge of a manufacturing-led economic expansion.
Just look at the car market. After three months of COVID-related production delays, the market is so tight buyers are flocking to the used market. Dealers report inventory is at a historic low and only 3% of what there are 2021 models compared to 25% in 2019.
And the shortages are not limited to automobiles, backorders for most major appliances are listed for some time in 2021. The takeaway for investors is this. Manufacturing industries are about to go into overdrive to catch up with demand and that means continued demand from shippers of all variety.
CSX Reports A Robust Rebound From The 2nd Quarter
CSX had a tough quarter to be sure. The companies revenue fell 11% YOY to $2.65 billion and missed consensus by about 100 basis points. What this comparison doesn’t show, however, is the 17% increase in revenue from the prior quarter or reflect the outlook for the next.
Looking forward, we can expect demand to at least remain steady if not improve and that doesn’t take holiday demand into consideration. The latest rumor I’ve heard floating around is that holiday capacity is already spoken for among most major shippers which open an opportunity for CSX to increase the number of cars and/or trains it sends across the country.
On a segment basis, coal was the weakest performing and down -36% from last year. The dip is due to reductions of coal-burning power plants as much as anything else so a major rebound should not be expected. Other areas saw smaller declines led by metals (18%), auto (9%), agriculture and food (5%), and other (12%). All segments are up from the previous quarter. The strongest segment is Intermodal which held flat on a YOY basis.
Moving down the report, the company’s expenses fell 11% in-line with the revenue decline, as did operating income. On an operational basis, management was able to control costs effectively and maintain a 56.9% operational ratio and best-in-breed status. Margins, however, increased due to operational efficiencies. The number of cars processed per hour increased by 20% resulting in GAAP EPS of $0.96 or $0.03 better than expected.
CSX To Return $5 Billion To Shareholders
As part of the report, the CSX board of directors approved an additional $5 billion for the buyback program. This brings the total available to over $6 billion on an incremental basis and that is in addition to the dividend. The dividend is worth $1.04 or about 1.26% with shares trading near $78.75.
The payout ratio is really low at 30% and there is a history of increases. Based on the balance sheet, earnings, and outlook for next year there is a high probability of future distribution increases. The next increase is due in January.
The Technical Outlook: CSX Is On Break Out Watch
The 3Q report sparked a little bit of volatility in the after-hours session but the outlook is bullish. Shares were first up more than 2% then down about the same but seem to be stabilizing in the +3.0% percent range.
Over the past few weeks, price action has been testing resistance at the pre-COVID high and forming what looks like a bullish triangle. Today’s move has price action right back at resistance, if it moves above it will probably keep moving higher for the next few months. My first target, assuming CSC breaks out to a new high, is in the $90 to $92 range.
