Railroads get little attention from investors. They’re not growth stocks in the sense that Apple and Tesla are, and one of them closed 2019 trading well below the S&P 500’s growth rate of around 29%.

That one railroad stock is CSX Corp. (NYSE: CSX), which posted an annual gain of just under 17.7% last year. Even the Dow Jones Transportation Index did better with a gain of nearly 19%.

There are seven Class I railroads operating in the United States. The largest is BNSF, part of Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A). Two are based in Canada: Canadian National Railway Co. (NYSE: CNI) and Canadian Pacific Railway Ltd. (NYSE: CP). The other four are CSX, Union Pacific Corp. (NYSE: UNP), Kansas City Southern (NYSE: KSU) and Norfolk Southern Corp. (NYSE: NSC).

Of the four U.S.-based, independent freight haulers, all but CSX performed better than the S&P 500 for the year. Norfolk Southern stock added just over 30% last year, Union Pacific added more than 34% and Kansas City Southern gained a whopping 62%.

What Happened to CSX in 2019

Blaming lower shipments of coal for CSX stock’s less-than-thrilling performance last year is naming only part of the problem and was surely expected. For the full fiscal year, CSX reported coal carloads fell from 887,000 in 2018 to 843,000 and coal revenue fell from $2.25 billion to $2.07 billion.

Less anticipated was a drop in the company’s intermodal traffic, the 20-foot and 40-foot containers that arrive at U.S. ports from all over the world. Intermodal shipments fell 8% from 2.90 million units to 2.67 million and revenue fell 9% from $1.93 billion in 2018 to $1.76 billion last year.

Fourth-quarter revenues were lower, the company said, due to lower volumes and negative mix from coal market headwinds. CSX posted earnings per share in the fourth quarter of 2019 of $0.99, on revenue of $2.89 billion, a year-over-year drop of 8%. For the year, revenue was down 3% and earnings per share were up 9%. Luck or higher pricing had nothing to do with it.

The railroad posted its lowest full-year operating ratio ever in 2019, 54.8%, significantly better than its 2018 ratio of 60.3%. A railroad’s operating ratio is one of those non-GAAP measures that an industry settles on as being most indicative of its true performance. The operating ratio is nothing more than total expenses divided by revenue. Like golf, lower is better, and none of the other independent Class I railroads is within five points of CSX’s operating ratio.

However, the company’s only growth segments were agricultural and food products, up 2% to $354 million, and minerals, up 6% to $138 million. Neither is going to grow enough to offset continuing losses in coal or intermodal shipments.

Where Might Added Revenue and Profits Come From

In his outlook comments for 2020, CEO James Foote said that revenue is projected to be flat to down 2% year over year. The operating ratio for the year will rise to 59% and capital expenditures will range between $1.6 billion and $1.7 billion, essentially flat with 2019. CSX will continue to return capital to shareholders and is committed to maintaining a “strong investment grade rating.”

Analysts are forecasting first-quarter earnings of $0.92 a share on revenue of $2.85 billion. For all of 2020, earnings per share are estimated at $4.19 on $11.84 billion in revenues.

The implication is that volumes in coal and intermodal transportation will once again decline and operational efficiency is unlikely to make up the difference.

At last November’s RailTrends conference, CSX executive vice president of marketing and sales, Mark Wallace, outlined the company’s strategy, highlighting the rail industry’s rather paltry 8% share of the $980 billion spent annually on transportation: “Truckers have been eating our lunch for decades. … The uncomfortable truth is that many former and potential rail customers have, however reluctantly, demonstrated a willingness to pay a premium for the superior reliability offered by the truck.”

Increasing railroads’ reliability with a process called precision scheduled railroading (or PSR, as it is often called), a system that focuses on running trains between two points on a network at a specified time. This is different from the traditional hub-and-spoke model, where railcars tend to enter a hub and are then attached to a train en route to its final destination.

This is an improvement, as CSX’s record-low operating ratio demonstrates. Yet, as every other railroad adopts the system, railroading becomes a zero-sum game.

Railroads are not going to steal customers from trucking companies that operate over the so-called last mile to the customer’s door. The object should be figuring out a way to increase railroads’ share of that $980 billion to 10% or more. That is apparently not on the table yet.

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