–When CSX (NYSE: CSX) reported a third quarter 2018 operating ratio (OR) of 58.7 percent, an improvement of almost 1,000 basis points over the third quarter of 2017, it was such a stunning number that it set off enough discussion in the industry over the apparent enormous success of precision railroading (PSR) that Union Pacific (NYSE: UNP) and Norfolk Southern (NYSE: NSC) in fairly quick order followed suit by saying they were going to go down the PSR route (Union Pacific) or make changes that looked suspiciously like it (Norfolk Southern). In the fourth quarter of 2018, CSX’s OR was 60.3 percent, which is a 400 basis point improvement over the 60.7 percent posted in the fourth quarter of 2017. (A lower OR is desirable, so 60.3 percent is better than 60.7 percent.) For the full year, CSX said its OR was 60.3 percent, which it said in its prepared earnings statement is a full year record for a Class 1 railroad. The outlook for 2019 that was to be delivered later Wednesday afternoon on the earnings call by CEO James Foote calls for the full year 2019 operating ratio to outperform the target of 60 percent that was set for 2020.
–In slides prepared for that call and released by CSX, it said fourth quarter revenue was higher on almost all lines of business. Forest products and metals & equipment were both up 15 percent; chemicals and automotive were up 10 percent and agriculture & food products were up 8 percent. Intermodal rose 4 percent. “Intermodal increased in both domestic and international markets, more than offsetting the impact of lane rationalizations, driven by existing customer growth, a tight truck market and new service offerings to inland ports,” the company said in one slide. Intermodal volume rose 2 percent to 732,000 units and revenue per intermodal unit was up 3 percent – to $672 from $655.
–Train velocity at 18.9 miles per hour was up significantly over the 16.2 mph reported a year ago, and terminal car dwell was down to 9.3 hours, a drop from 10.7 hours a year ago but an increase over the 9.0 hours of the third quarter. Reducing terminal car dwell is one of the key goals of precision railroading. Another goal is to reduce the amount of equipment out on the rails and get more out of the equipment that’s still there. In that regard, CSX did well. In just one year its cars online is down to 122,873 from 137,167. Locomotive miles per day was up to 175 from 144 a year ago.
–Revenue for the quarter of $3.143 billion was up 10 percent from the fourth quarter of 2017. With so much emphasis on reducing headcount as part of precision railroading, labor and fringe costs were down just $3 million – but in a time of tight labor markets, that is a significant change. Operating income was up 11 percent to $1.249 billion, so it increased at only slightly higher rate than revenue. Net income plummeted on the back of tax expenses. Earnings per share on a GAAP basis were $1.10 per share, which SeekingAlpha said it two cents better than consensus forecasts while revenue was in line.
–In a quick-hit reaction to the earnings, Deutsche Bank’s Amit Mehrotra said the guidance for 2019 on outperforming the 2020 60% target OR “is a bit disappointing, albeit largely reflecting a very strong 2018 base level.” He said that the estimates among analysts for 2019 already were to beat that 60% figure–“consensus OR is 59% and we’re likely to be bullish at 58%)–and the restrained forecast is presumably “reflecting uncertainty around macro, export coal volumes and land sales which drove 2018’s very strong performance.”
