CSX Exec boasts confidence in continued turnaround

Implications: Mike Ward said that CSX would continue to enjoy double digit earnings growth for another few years, and he put an exclamation point to his forecast by boosting the share buyback program and increasing the dividend on these shares outstanding. His inspiring words however, might just have been an opening salvo against the investment funds who want to scale back CSX’s capital investment programs in order to reward their short term investments. It’s a shame that such bravado is necessary, but it would also be a pity if The Children's Investment Fund and 3G Capital Partners were allowed to loot the CSX treasury for their short term gain at the expense of other investors and perhaps the US taxpayers if they set up another Conrail type bailout in the future.

Analysis:  All the railroads have benefitted from the pricing power that a near capacity operation and a runaway inflation in commodity prices allow. From a rail shipper’s point of view, the pair of developments might be likened to the perfect storm. However, while railroads might be assured near capacity operations for the indefinite future, continued inflation in commodity prices is not as certain. Economic forces have a way of adjusting for distortions in prices over time, and it is not at all certain that the current trends can be maintained over the long time required to reach to 2010.   That said, there are other developments at CSX that might just possibly make the prediction more likely than the continuation of the economic trends of the past few years. After nearly 20 years of mega-mergers that began with the Chessie System and the Family Lines in the mid-1980s and ended with the combination of CSX and part of Conrail in the late 1990s, this railroad has only recently developed a cohesive management team and is only now really beginning to concentrate traffic on core line segments that are being given priority for capital upgrades. The strategy is by no means a certain route to success, but it is at least an attempt to rationalize the spider-web of rail lines that have been cobbled together through past mergers. Without the financial resources that have been accumulated in recent years through the pricing power developments, the capital upgrades planned for the future would not have been possible and the continuation of the subpar performance of this company with operating ratios around 80%  would have been the norm. Instead, operating ratios may begin to fall in future years not just because of increasing revenues, but also due to decreasing costs; at least that is the plan. CSX has a long way to go before it can aspire to the operating ratios in the low 70% range of its main competitor in the East, but at least it now has a plan to get there.