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Thursday, October 14, 2010

CSX's ER


Today the market has a good run and it seems mainly due to the good earning reports from Intel, JP Morgan and CSX. These companies provided investors more hope of a good Q3 earnings in general. We all know Intel and JP Morgan. Who is CSX?

“CSX Corporation (CSX) is a transportation company. The Company’s rail and intermodal businesses provide rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers. CSX’s principal operating company, CSX Transportation, Inc. (CSXT), provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec. It serves over 70 ocean, river and lake ports along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway. In addition to CSXT, the rail segment includes non-railroad subsidiaries Total Distribution Services, Inc. (TDSI), Transflo Terminal Services, Inc. (Transflo), CSX Technology, Inc. (CSX Technology) and other subsidiaries.” From Google Finance

CSX is important because it ships all kinds of goods all over the place! If it has a good earning, revenue and outlook it’s just natural for investors to be optimistic about the numbers other firms will report. Here is one summary about CSX’s yesterday’s ER report: CSX (CSX) reported robust earnings late last evening, with earnings of $1.08 per share against a $1.04 analyst consensus, with sales rising more than $500 million to $2.7 billion for the quarter. CSX observed a rise in freight volumes in nearly all markets for the third quarter. CEO Michael Ward remarked that “as the economy continued to improve, CSX saw volume growth in nearly all markets”.


Alright, 4% pop on CSX stock price is a pretty decent move here. Was it justifiable? Again, I’ll go through the same drill as I did in Intel’s ER. First, what were the opinions of analysts?
Obviously, analysts were not very optimistic about the firm when only 30% analysts issued strong buy or similar ratings. And their estimate of future growth for the company is less than those of industry and sector. Keep in mind these opinions are for at least mid-term or long term view.

Then how has the company manage the EPS expectations? Pretty good---always beat for past few years at least as shown in next graph.


How the stock price vary after its ER? Next graph illustrate a short term (2, 5, 30 day) return if the stock were bought at the close of ER day. Not that you can use this figure to make money right away but it serves as a good reference. One easy thing to pick up is the ER day return: most of them are positive. when I look closer I found the mean is 3% with sigma of 5%. It seems to has better chance betting upside on ERs (a more obvious graph is shown also). 





Now let’s move on to my favorite analysis: ratio analysis. The following two graphs both tell me one story: profitability is good, which I believe is due to cost management. For example, SG&A stays at a low level of 27% while gross margin is the highest for the past 6 quarters. However, if you compare this quarter to previous quarter rather than the quarter a year ago you will find that almost everything stay the same. What that tell me? Well, yes, the economy is recovering but it also tells me that the slowed growth is confirmed. It will be interesting to watch the GDP number for Q3 and see if it can confirm my guess here. Last quarter GDP growth rate is 1.7% and my guess for Q3 would be less than that by just looking at CSX’s number very naively. We’ll see.

Just a side note: you might be wondering what the heck are the Z score and M score. Z score helps to identify bankruptcy risk and M score detects the possibility of account fraud. For CSX Z score is low but I assume it’s the nature of business as CSX has to have large fix asset and need a lot of debt to support it. It will be good to compare with peers to see if it’s the case. When I get a chance I’ll test that and update my results here.



In summary, CSX did have a good quarter but I believe what really move the stock and even the market has something to do with the company boosts spending for future (good confidence to have) and announced additional $646 million share buyback. Well I’ll watch CSX from now on since it’s kind of bellwether of the economy.





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