CSX Corp. (NYSE: CSX) is showing exactly why Warren Buffett has been so pessimistic lately. Q2 2009 earnings were $308 million or $0.78 EPS.  This is down from $385 million, or $0.93 EPS, a year ago.  If you exclude discontinued operations related to the Greenbrier Resort, the earnings on a comparable basis were $0.72 EPS compared to $0.95 a year ago. While this is not as bad as some expected, there is a continued erosion as CSX said railroad freight volume is expected to fall by double-digit percentage rates in Q3.  The only comfort is that the target is set lower than the 21% decline seen in Q2.  As Warren Buffet and Berkshire Hathaway Inc. (NYSE: BRK-A) are huge railroad investors (but not in CSX), and as he uses this rail freight traffic as a leading indicator, this has an impact on Buffett’s other railroad stocks of Burlington Northern Santa Fe (NYSE: BNI), Norfolk Southern (NYSE: NSC), and Union Pacific Corp. (NYSE: UNP).

You can see Buffett’s full railroad and other full holdings as of last quarter.  As they often have, those Buffett stakes could be even larger now as he has slowly added to these over recent quarters.

CSX did note that the plunging volume appears to leveling off and it seems that most of these markets are stabilizing.

Where the drops are may have more broad insight than just the sum of the parts.  Coal shipments fell 21% in Q2 after seeing a prior 7% drop in Q1…. based on lower use by electric utilities and based on lower natural gas prices.  Lower coal exports were also partly blamed on Europe cutting its steel production.  While coal volume will moderate in Q3, no real updates are given.

These do not include fuel surcharges.  The core prices were about 6.6% higher in Q2 and 6.5% in the first quarter.  It is too soon to see if this will hold up or not.  But CSX plans to raise its 2009 core prices above the prior 5% to 6% indicated.  If that holds, the company has solid freight salespeople if it can hike prices when demand is lower. That is particularly the case when competition truck and barge is adding some price pressure when they are available to compete directly in certain markets.  CSX is also projecting that 2010 core prices will outpace inflation.

The proof will be in the pudding here.  The company is showing that it can hold down costs.  Whether the same price increases can be passed on may depend upon volumes rather than its internal goals.  Customers seeing price hikes in the current climate when they know volumes are way down may start to call transporters’ bluffs.

CSX shares are up over 4% at $34.10, Burlington Northern Santa Fe shares are up by 2% at $71.55, Norfolk Southern shares are up by 2.9% at $38.50, and Union Pacific Corp. are up 3% at $52.82.

JON C. OGG
JULY 14, 2009

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