Morningstar | CSX Delivers Outstanding 59.5% Operating Ratio, Expects Sub-60% for 2019
We expect to make no major change to our CSX fair value estimate after first-quarter results because we already expected modest revenue expansion paired with improved margins this year, and the rail did not disappoint. In fact, CSX improved its operating ratio by 420 basis points year over year to a first-quarter record of 59.5%. Operating income increased 17% and EPS grew 31%. Concerns that CSX would stumble after the sudden loss of CEO Hunter Harrison in December 2017 have now been proved misplaced, as CEO Jim Foote and crew continue to maintain discipline that in our opinion would delight Harrison, by driving down costs, rightsizing assets, and retaining adequately remunerative freight movements.CSX increased revenue 5% and reduced costs 2% because of carrying fewer employees and assets while improving many service metrics. All major commodities increased revenue except fertilizer and intermodal (down 5% each), and the intermodal decline is intentional as CSX rationalized additional lanes after peak season--regional short-haul intermodal demands excess handling, which adds cost and reduces fluidity. Going forward the firm expects intermodal growth to be muted this year due to these decisions, but will grow as service proves to be reliable over time. Management indicates reliability is the quality of greatest value to most customers, with only international intermodal chiefly focused on price.
CSX has reduced its active locomotive count by 10% year over year--a hallmark of precision scheduled railroading. As well, the firm has reduced its workforce of about 22,000 by 500 from end of 2018. Compared with the prior-year period, CSX improved train velocity 17%, dwell time 14%, and gross ton miles per horsepower 9%. High-margin export coal and domestic metallurgical coal shored up results, but we are still impressed by the magnitude of CSX's profitability improvement even after a couple of years of operational progress.
CSX provides rail-based freight transportation services. The company's principal operating subsidiary, CSX Transportation, Inc., provides a link to the transportation supply chain through its rail network, which serves centers in states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The company's CSX Intermodal Terminals, Inc. subsidiary owns and operates a system of intermodal terminals, primarily in the eastern United States and also performs drayage services (the pickup and delivery of intermodal shipments). The company's Total Distribution Services, Inc. subsidiary serves the automotive industry with distribution centers and storage locations.
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