Wednesday, October 13, 2010

CSX (CSX) Confirms Many Themes

Many quarters Intel (INTC) and CSX (CSX) report on the same day or within 24 hours of each other; almost everyone focuses on Intel as some tell on the economy but from this seat CSX is far more important*.

That said, you cannot view anything in a vacuum and the railroads are benefiting from secular trends - most importantly winning a lot of business from the staggered trucking business.  Further, as with most U.S. corporations cost containment is key (read: chopping labor and then when business rebounds, only bringing back labor slowly), and the railroads have pricing power - so only looking at the headline number and trying to extrapolate on 'economic activity' is too blunt an instrument.

  • The CEO of CSX Corp. said Wednesday the railroad still has more room to grow its trains without adding staff, a key component of the efficiency that's allowed it to grow earnings at a much faster pace than shipments have picked up.
  • The company can still grow carrying capacity by 10 to 15%, depending on the type of train.
  • 6.6% increase in prices pushed through.
  • Overall, shipments were up 10%
  • Intermodal volumes rose 19%

Point being, does a 6.6% price increase have anything to do with better economic activity (or worse?) no - it's more a reflection of the railroad v trucking dynamic.
  • “There is some pricing ability because we are an attractive option for people,” Ward said. “If they look at their options of moving stuff by truck or other modes, rail is the most attractive to them.


That is not to say the data is not interesting - indeed CSX confirmed a lot of things that we've been discussing for months and quarters.

  • Asia is where it's at
  • Auto shipments picking up
  • Agriculture is positive
  • Coal for export is hot
  • Coal for U.S. usage i.e. utilities is not
  • Lumber not improving - reflection on domestic housing
  • Retail shipments for Americans are "meh" despite government now providing nearly 1 in 5 dollars of income, and many millions of households not paying their mortgage - i.e. the self created stimulus
The one change in the market and in CSX's report was the uptick in chemicals.  This is a positive as this sector is a good broad economic indicator.  It is impossible to tell how much is for domestic use versus international, but we can assume like everything else the strength is mostly due to overseas demand.
  • Chemical volume rose 5%. 
Stock specific - the auto supplier stocks have been excellent the past few months - even before the QE party, as have chemicals.


Some other comments:
  • CSX expects continued weakness in the housing and construction markets because of slow growth in new homes and infrastructure development projects.  "There are no signs that (the housing market) is about to rebound," Ward said. "It's not declining, just not really improving."
  • Coal shipments, which account for slightly more than 30% of revenue, were up 3% from a year ago, driven by overseas demand from foreign steelmakers.
  • Third-quarter automotive and car-parts shipments jumped 44%
  • Shipments of forest products, food and consumer products were flat, it said. Continued weakness in the construction sector hurt forest products, which includes lumber and other building materials, while weakness in demand for appliances crimped shipments in the food and consumer segment.

One "positive" - more Americans are drinking their sorrows away.
  • In the consumer segment, CSX said higher demand for refrigerated goods and alcoholic drinks was offset by continued weakness in demand for appliances.

Is really is a tale of 2 global economies right now - again, all those on CNBC who claimed in 2008 and early 2009 the U.S. would lead the world in recovery (narcissism at its best) should wear their scarlet letter and publicly apologize... the "first in, first out" meme was annoying then, and seeing the same faces show up nowadays spewing their 'sense' is bemusing at best.  These pundits completely missed the structural domestic issues we have been outlining (Economic Forecasts) since BEFORE the recession - the 'value add' from the narrowly focused "NY / DC" corridor Johnny Come Lately crowd is paltry, other than to realize what group think is all about.

*Remember, right now the economy is completely moot to the stock market - all economic data is to be simply read, reviewed, and disgorged under the party that is QE2.

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