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Freight rail services provider CSX (NASDAQ:CSX) missed Wall Street’s revenue expectations in Q3 CY2024 as sales only rose 1.3% year on year to $3.62 billion. Its GAAP profit of $0.46 per share was also 4% below analysts’ consensus estimates.
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CSX (CSX) Q3 CY2024 Highlights:
- Revenue: $3.62 billion vs analyst estimates of $3.68 billion (1.5% miss)
- EPS: $0.46 vs analyst expectations of $0.48 (4% miss)
- Gross Margin (GAAP): 48.9%, up from 47.4% in the same quarter last year
- Free Cash Flow Margin: 29.3%, up from 27% in the same quarter last year
- Sales Volumes rose 2.6% year on year (-2.3% in the same quarter last year)
- Market Capitalization: $68.83 billion
Rail Transportation
The growth of e-commerce and global trade continues to drive demand for shipping services, presenting opportunities for rail transportation companies. While moving large volumes by rail can be highly cost-efficient for customers compared to air and ground transport, this mode of transportation results in slower delivery times, presenting a trade off. To improve transit times, the industry continues to invest in digitization to optimize fleets, loads, and even braking systems. However, rail transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.Sales Growth
Reviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Unfortunately, CSX’s 3.8% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis.Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. CSX’s recent history shows its demand slowed as its revenue was flat over the last two years. We also note many other Rail Transportation businesses have faced declining sales because of cyclical headwinds. While CSX’s growth wasn’t the best, it did perform better than its peers.
We can dig further into the company’s revenue dynamics by analyzing its sales volumes, which reached 1.59 million in the latest quarter. Over the last two years, CSX’s sales volumes were flat. Because this number is in line with its revenue growth, we can see the company kept its prices fairly consistent.
This quarter, CSX’s revenue grew 1.3% year on year to $3.62 billion, falling short of Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, an acceleration versus the last two years. While this projection illustrates the market thinks its newer products and services will spur better performance, it is still below average for the sector.
Operating Margin
CSX has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 40.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.Looking at the trend in its profitability, CSX’s annual operating margin decreased by 3.3 percentage points over the last five years. Even though its margin is still high, shareholders will want to see CSX become more profitable in the future.
In Q3, CSX generated an operating profit margin of 37.4%, up 1.8 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.
Earnings Per Share
Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.CSX’s EPS grew at an unimpressive 5.9% compounded annual growth rate over the last five years. This performance was better than its 3.8% annualized revenue growth but doesn’t tell us much about its day-to-day operations because its operating margin didn’t expand.
Diving into the nuances of CSX’s earnings can give us a better understanding of its performance. A five-year view shows that CSX has repurchased its stock, shrinking its share count by 18.4%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business. For CSX, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.
In Q3, CSX reported EPS at $0.46, up from $0.41 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects CSX’s full-year EPS of $1.85 to grow by 11.4%.