Today we find out what it means to go into a down year. Today we find out whether a stock that has fallen from $35 a year ago to $23 today has fully discounted that potential decline.
Today we find out if CSX Corp. (CSX) can bottom on what is surely a disappointing outlook and a very negative quarterly report. It could be the most important template for this quarter, because the whole goal of this moment is to try to figure out how to value the stocks of excellent franchises that have some secular and cyclical headwinds for 2016.
First, CSX makes no bones about it, saying right up front that 2016 will be a hard year because of:
- Low commodity prices,
- A strong US dollar and
- An energy market transition.
The first two are, hopefully for CSX, cyclical issues although with the beleaguered state of the growth in the rest of the world, the cyclical decline could be more severe than some thought just a few months ago.
The third is devastating, the wholesale shift away from key rail cargo, coal. Even though coal still represents 34% of the production of power in this country, down from 38% just a few years ago, the growing use of natural gas, up 12% in two years, isn't going away. It will only accelerate if Hillary Clinton is elected president, because if the EPA right now isn't demanding coal plant closings, that could change.
Plus, the export market for coal, a crucial part of CSX's business, is declining, and the metallurgical coal is deeply in decline because of the unraveling of the U.S. steel industry in the face of dumping from overseas and a decline in oil pipes.
Last year, only one of 12 lines of cargo was projected to be negative export coal. Now many of them are turning down.
More importantly, last year at this time CSX predicted double digit earnings gains for 2015. Now the company is expecting an actual decline in earnings. Revenues fell a staggering 13% this past quarter, with a 6% volume decline that could no longer be made up by the company's excellent expense control of 13%, which included the decline in fuel costs, a principal expense of the enterprise.
"With negative global and industrial market trends projected for 2016," the company acknowledges in a sober way, "full-year earnings per share are expected to be down compared to 2015," despite what is a truly remarkable sub-70% operating ratio, the amount of operating expenses as a percentage of revenue.
We will know more after the conference call, but the main issue here is that given that "everyone" knew that CSX was going to be bad, is it bad enough, and are the estimates low enough that they take into account today's EPS estimate reductions that stem from the company's comments?
Keep this one on your radar screen. It will determine much about what to do with a stock that's already down in the face of an extremely sour earnings outlook.
And remember, this outlook for one of the big three rails is given in the face of the Fed's specific goals of tightening four more times this year.
Can you imagine?