CSX Delivering Profits That Hunter Harrison Was Promising

Profits Top Wall Street's Expectations

CSX Corp has reported quarterly profit that topped Wall Street's view and raised its full-year revenue forecast, as the No. 3 U.S. railroad operator benefited from ongoing cost-cutting and higher prices for moving freight.

Shares in CSX, which forecast 2018 revenue growth of 6 percent to 8 percent, largely due to unexpected strength in exports of coal, were up 1.7 percent at $73.40 in extended trading.

Wall Street was watching for signs that looming threats, such as tariff-driven trade disruptions and rising fuel costs, are hitting the sector's profitability.

Third-quarter net income at CSX almost doubled to $894 million, or $1.05 per share, topping the average estimate of 94 cents, according to Refinitiv data.

Interruptions from Hurricane Florence, which included the loss of five miles of track due to flooding and revenue losses due to transit disruptions, reduced earnings by 2 cents per share during the latest quarter.

CSX executives also said they expect no significant financial impact from Hurricane Michael, a fast-moving storm that slammed Florida's Panhandle last week. CSX and other U.S. transportation providers are widely seen as a bellwether for the U.S. economy.

Third-quarter revenue increased 14 percent from a year ago to $3.13 billion.

“The price increases that CSX receives for shipments are picking up” due to the tight trucking market that benefits both the Jacksonville, Florida-based company's container and general merchandise businesses, Edward Jones analyst Dan Sherman said in a client note.

Expenses fell 2 percent from a year earlier to $1.84 billion, as costs associated with increased volume and higher fuel prices were more than offset by efficiency gains. CSX has already hit its target of reducing headcount by 2,000 and executives vowed to make further cuts next year.

CSX Chief Executive James M. Foote told Reuters that tariffs on aluminum, steel, and soybeans have had minimal to no impact on the railroad and that a simmering trade war with China has not been a negative for the U.S. economy.

“We are drastically changing the way we operate the railroad”James M. Foote, Chief Executive, CSX

Foote, who has promised to take Hunter Harrison's Precision Scheduled Railroading turnaround effort forward, further stated to analysts;

“We are picking up right where Hunter left off, and we are going to deliver, just as he envisioned the way we operate the railroad by taking millions of unnecessary steps out of the business process that we use to run the railroad.”

This “drastic change” involves eliminating 2,200 jobs by the end of 2018, following the shedding of 3,300 jobs and 1,000 contractors and consultants in 2017. It also anticipates a further elimination of 4,000 jobs by 2020 through cuts and attrition.

CSX also plans to cut the number of locomotives by up to 20% by 2020, and shrink its fleet of rail cars by more than 20%. During the first nine months of 2017 when Harrison was in charge, he postponed 1,000 locomotives and removed about 60,000 freight cars from service.

“When there was a change in upper management, people kind of compensated and said 'well we are not going to get what Hunter Harrison was going to give us',” said Dan Sherman.

“But with (Tuesday's) result it's possible that's not true at all, and we'll get exactly what Hunter had promised,” Sherman added.

CSX hit its turnaround goal of driving down operating expenses as a percentage of revenue earlier than analysts expected, and Foote said the railroad has more opportunities to reduce overhead and boost revenue.

“We have a ton more to do” to continue to improve efficiency and grow the business, Foote told Reuters.

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