Despite Volume Decline, CSX Protects Some Earnings

Steeper volume declines in the second quarter than in first-quarter 2009 along with greater declines in higher margin segments (e.g., coal) worked against CSX, says Morgan Stanley Research.

Despite the 21% volume decline, CSX operating earnings fell only about 30%, excluding the reversal of a casualty reserve (which wasn’t in our estimate), said Morgan Stanley. “Moreover, we remain upbeat about prospects in the second half of 2009.” Recent cost cuts and pricing power offer substantial upside in any volume recovery, the report continued. “We believe volumes are close to a trough,” said Morgan Stanley.

“Consensus estimates may have bottomed and are likely too low if 2H09 is characterized by a sequential rebound in volumes, led by increased auto-production rates. CSX remains a top pick.”

CSX benefitted from an $85 million reduction in the company’s casualty reserve ($5 million of which is likely ongoing), noted Morgan Stanley. Cost control was generally in line with expectations, despite weaker volumes from higher margin coal and merchandise segments.

We expect fewer surprises from rails this quarter,” said Morgan Stanley. “However, as auto production and related higher margin inputs begin to rebound in 3Q09, rail earnings and sentiment are both likely to improve.”

Comments by CSX management may offer signs of volume stability or pending recovery as well as clarity on yield drivers and the pricing environment.