Bloomberg News

East Coast Rails Drive S&P Gains as Profits Top Estimates

January 23, 2013

East Coast Rails Drive S&P 500 as Earnings Top Estimates

A CSX Corp. locomotive engine moves through the company's railroad yard in Bedford Park, Illinois. Photographer: Tim Boyle/Bloomberg

CSX Corp. (CSX:US) and Norfolk Southern Corp. (NSC:US), the two largest U.S. eastern railroads, placed among the 20 top gainers on the Standard & Poor’s 500 Index today after their fourth-quarter profits beat estimates.

CSX stock advanced 4.2 percent to $21.68 at the close in New York, the largest gain since March 15. Norfolk Southern gained 2.2 percent to $68.41, the highest in four months.

Gains in container cargos at CSX, Norfolk Southern and Kansas City Southern helped counter sliding coal volumes in the fourth quarter, signaling that the industry is adapting to declines in shipments of the fuel. Union Pacific Corp. (UNP:US), the biggest U.S. carrier, will report results tomorrow.

CSX and Norfolk Southern “put up good numbers in a very difficult environment, slightly better than expected,” said Peter Nesvold, a Jefferies Group Inc. analyst in New York. “These companies do a really good job redeploying assets in other parts of the network when things like coal are soft. It’s going to be difficult for them to grow earnings meaningfully until you start to see a rebound in coal.”

Intermodal-container shipments, which can move via highway, ocean or rail, rose 2.8 percent at CSX, 3.2 percent at Norfolk Southern and 4.6 percent at Kansas City Southern, according to Association of American Railroads data. Coal, which remains the biggest single product carried by the major railroads, fell about 14 percent at the largest North American carriers as utilities abandoned it for cheaper natural gas.

Electricity Demand

While the three companies all beat estimates, each posted profit declines from a year earlier. Norfolk Southern will face “continuing headwinds” from coal in 2013, Chief Marketing Officer Donald Seale said during a conference call yesterday.

“For utility business to rebound in terms of its volume and to help us grow that business back, we need electricity demand to pick back up, we need industrial load demand for electricity to improve, and we need gas prices to move up into above the $3.50 to the $4 range,” Seale said. For exports to increase, “the world economy needs to improve.”

Volumes have also been damped by the European economic slump, which is curtailing exports of metallurgical and steam coal.

Norfolk Southern has no plans to purchase new coal cars in 2013 and will instead “re-body” its existing fleet, Chief Executive Officer Charles “Wick” Moorman said on the call, using the industry term for rebuilding and refurbishing the units.

Tax Rate

Sales tied to coal shipments dropped 23 percent in the fourth quarter to $657 million, the Norfolk, Virginia-based company said. Coal carloads fell 13 percent in the period, the railroad said.

Norfolk Southern also benefited from a favorable tax rate in the fourth quarter, Jefferies’ Nesvold said in a telephone interview. CSX had a 3-cent per share benefit from the sale of a non-operating property, CEO Michael Ward said during a conference call today.

Coal volumes at CSX slumped about 19 percent in the period from a year earlier, the Jacksonville, Florida-based company said yesterday.

CSX Chief Commercial Officer Clarence Gooden said today that pressures on coal volume will moderate in 2013. The carrier forecast a 5 percent to 10 percent decline in full-year domestic coal volumes and a slip in exports to about 40 million tons.

U.S. Policy

CSX can still boost earnings even without a rebound in coal volumes, Ward said in a telephone interview.

“It’s my belief that if we see some resolution of the issues in Washington D.C. around the fiscal policy of the nation that we could see actually a stronger recovery in the second half of the year,” he said. “Were that to occur, I think we could do well even with the coal continuing to be down. Would I rather have the coal? Of course.”

Growth will come from further gains in intermodal cargo and expansion into crude-by-rail and other new markets, Ward said.

Container shipments are “a key growth engine for CSX and for the industry,” he said.

Auto Shipments

Shares of Kansas City Southern (KSU:US), the smallest of the major North American railroads, climbed 0.8 percent to $92.42, adding to gains yesterday that boosted the shares to the highest since at least 1980. The railroad yesterday reported fourth-quarter revenue that beat analysts’ estimates (KSU:US) on a 2 percent increase in carloads.

“Given the drought, the continued pressure on our utility coal franchise and the uncertainties prompted by fiscal cliff concerns, we’ll take those numbers any day of the week,” CEO David Starling said on a conference call.

Automotive-shipment revenue climbed 33 percent in the period, helping make up for a 19 percent plunge in the carrier’s utility coal business, Kansas City Southern said.

Kansas City Southern, which transports goods from the Mexican port of Lazaro Cardenas to Laredo, Texas, on a line purchased from the Mexican government, is benefiting from new manufacturing plants south of the U.S. border.

“The company’s management is doing a fine job,” John Larkin, a Baltimore-based analyst at Stifel Financial Corp., wrote in a note yesterday. “The opportunities in Mexico, for the company, are immense over the long-term.”

Net income (KSU:US) at the Kansas City, Missouri-based company of $92 million, or 83 cents a share, surpassed an average projection of 82 cents from analysts surveyed by Bloomberg.

CSX profit (CSX:US) of $443 million, or 43 cents a share, also topped the 39-cent mean projection. Norfolk Southern’s earnings of $413 million, or $1.30 a share, compared with a $1.19 estimate.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • CSX
    (CSX Corp)
    • $31.1 USD
    • -0.03
    • -0.1%
  • NSC
    (Norfolk Southern Corp)
    • $107.78 USD
    • 0.94
    • 0.87%
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