(Dow Jones Newswires circulated the following story by Terry Kosdrosky on October 17.)
NEW YORK — CSX Corp. (CSX), a railroad facing new pressure from an activist shareholder, said late Tuesday that third-quarter net income rose 24% despite lower overall volume.
The Jacksonville, Fla., company saw volume drop 4% but was able to offset that with an 8% improvement in revenue per unit. CSX is the first railroad to report third-quarter earnings, and its results could be a preview for the industry.
Revenue in forest products was down due to the slowdown in residential construction. Intermodal revenue, which has been a strength for the industry, also declined.
Some analysts are concerned that demand will weaken in key railroad markets at the same time that many companies in the industry consider taking on more debt for such undertakings as stock buybacks, since hedge funds and activist shareholders have bought stakes in railroads this year.
CSX, in fact, received a sharply critical letter earlier Tuesday from hedge fund shareholder The Children’s Investment Master Fund, which urged a number of corporate governance and business changes. The London-based fund, known as TCI, owns a 4.1% stake in CSX.
Still, CSX’s third-quarter results beat analyst expectations, giving the stock a boost in after-hours trading. CSX shares were up 1.8% recently at $43.60, after gaining 1% during the regular trading session.
In the quarter ended Sept. 30, CSX recorded net income of $407 million, or 91 cents a share, compared with $328 million, or 71 cents a share, a year earlier. On a continuing operations basis, earnings per share increased 24% to 67 cents a share, from 54 cents a share in the year-earlier period. Revenue climbed 3% to $ 2.5 billion.
On average, analysts had expected per-share earnings of 62 cents on revenue of $2.49 billion, according to a poll by Thomson Financial.
“Our core earning power continues to improve in a more challenging transportation environment,” CEO Michael Ward said in a statement.
In September, Ward said the company’s sagging freight volumes were yet another casualty in the U.S. housing market debacle, which has cut deep into the shipping volume of roofing materials, lumber and asphalt. The company said earlier in the year that a strong pricing environment would drive earnings even as volume softened.
In its quarterly report released Tuesday, CSX said that pricing strength – due to the competitive advantage of railroads as a transportation solution and because of higher levels of customer service – helped offset weakness in housing construction and related markets.
Revenue from shipments of forest products fell 9% in the third quarter versus a year ago, amid volume declines in lumber and panel shipments resulting from the downturn in residential construction, CSX said. Metals shipment volumes fell 2%, also primarily as a result of the housing market downturn, though CSX managed to increase revenue in the segment by 3% thanks to improved revenue per unit.
Improved pricing also benefited the company’s coal shipping business, which posted an 8% increase in revenue even as volume fell 2% from a year ago.
In the intermodal business, which involves cargo that’s handled on more than one mode of transportation, revenue fell 7% in the latest period. Intermodal volumes were lower primarily due to the termination of certain customer contracts, losses due to select steamship carriers withdrawing from certain markets and slower growth from Asian markets, CSX said.
While CSX’s latest results beat analysts’ expectations, there are concerns that a slowdown in demand will cut into the pricing power of the major U.S. railroads. That could cut into their appeal among investors, many of whom have plowed into railroad stocks in recent months.
Barclays Capital said Tuesday in a report that pricing has slowed along with weaker demand recently. “Consequently, we worry that lofty valuations will not be sustainable, prompting railroad managements to further increase leverage to appease activist investors…as exemplified by CSX.
“While management teams have maintained their desire for investment-grade ratings, increased shareholder pressure could cause a revaluation of balance sheet goals,” Barclays said.
Market participants will get more clues on the health of the railroad industry Wednesday morning when CSX executives hold a conference call to discuss the latest results and the outlook for the coming quarters.
Fellow shipper Union Pacific Corp. (UNP) reports its results Thursday, while Burlington Northern Santa Fe Corp. (BNI) and Norfolk Southern Corp. (NSC) report next week.