CSX Posts Mixed Results; Adds to Buyback Program.

  CSX Corp. (NASDAQ: CSX – $54.64) announced second quarter net earnings of $510 million. Excluding a $122 million restructuring charge, adjusted earnings per share was $0.64, five cents ahead of what analysts were predicting.  But a $58 million settlement with a customer and a $55 million land settlement added $0.08 to the bottom line. As such, results were “just shy” of lofty expectations by around three cents per share. Revenue for the period increased 8% to $2.93 billion and above the Street consensus of $2.85 billion. CSX experienced growth across nearly all markets, primarily driven by coal-related gains, strength in core pricing and volume across the other markets and increased fuel recovery. In the period, CSX delivered improved asset utilization, cost control and fuel optimization. These operational improvements, coupled with the benefits from the management restructuring that was completed early in the second quarter, drove $90 million in efficiency gains, which more than offset other costs.

       CSX is intensely focused on implementing Precision Scheduled Railroading throughout the system following the arrival of new CEO Hunter Harrison who left Canadian Pacific Rail to join the company earlier this year. Management says its on track to achieve record efficiency gains and a step-function improvement in its key financial measures for the year given continued economic growth and stable coal markets. Adjusting for restructuring charges, the east-coast rail and intermodal carrier continues to expect to drive a full-year operating ratio in the mid-60s, earnings growth of around 25% from full year-2016 to $2.26 per share and free cash flow before dividends of around $1.5 billion. As a result, the Board authorized an additional $500 million for the current stock repurchase program, which now totals $1.5 billion. The Wall Street estimate for earnings per share for next year stands at around $2.86.

       The shares have been on a tear over the past year (up nearly 92%) and are amply valued at current levels. However, given modest economic growth and further cost reductions and operating efficiency, positions can be maintained in a well-diversified aggressive account.

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