Greetings, and never so happy to be called “negative” in my life – so let’s catch up on the two leadoff rail earnings reports, Union Pacific and CSX, from last week, which had remarkable similarities. Canadian National reports later today, and while the Canadian press is anticipating a CEO announcement, that (being material information requiring sort of instantaneous release) would surprise me….it will be a crucial call, whatever the lead story is. (NOTE - OH BOY DID I GET THAT WRONG! DETAILS ASAP)
Talking the talk, as expected - UP and CSX results showed many similarities, which makes sense given similar operating (PSR-to-growth-pivot) strategies and similar headwinds (pandemic effects on labor and the supply chain). Both met or slightly exceeded Street consensus earnings for Q4/21; both actuals were solid YOY (CSX +27%, UNP +13%). Comparisons are, remember, like apples to grapes, both fruits but different. In addition:
- Both showed volume declines in the quarter (-2% CSX; -4% UNP)
- But both showed revenue increases, nonetheless: (21% for CSX which includes another fruit, the results of Quality Carriers; +12% for UNP) – the reasons, for both, include fuel surcharge (still a lagging net negative for the quarter, of course), mix (struggling IM; strong….coal – more below), and price
- Coal was strong for both carriers, as it had been all year (and even more so than originally anticipated by the EIA, et al)
- Export coal was up 8% for the quarter for CSX (+10% for the year) which is the driver in the…42% (!) coal yield boom in Q4/21
- Despite the solid top line, both showed margin deterioration (increased ORs) – CSX by 310bps (including QC), UNP by 180bps. Both also were hit (as many of us were!) by Omicron – for example, in the first two months of the quarter CSX had some 30-30 T&E employees in isolation (etc); by year-end, it was over 300.
- CSX might consider a “core rail OR” to help some of the less sophisticated analysts out there – and avid some of the trouble CN has had to face; a bonus would be more transparency on Quality Carriers
- Both had operating problems, of course – in Trip Plan Compliance reductions, on-time deterioration, dwell increases, etc (etc) – mostly tied to labor and outside issues (mostly tied to labor)
- Both produced a solid financial performance for the full year: UP showed volumes up 4%, revenues up 12& and OR down 130bps; CSX’s respective numbers were +6%, +18%, and down 350bps….
- Both were optimistic, perhaps UP slightly more than CSX. The former projects unit growth above industrial production (estimated at +4.8%) and the latter at beating GDP (which the questioners put at +4% but is today more like +3%).
- Both expect second half outperformance to fuel the year – easing of supply chain issues, on-boarding crewmen (and the correlating easing of training expense), chip availability for autos
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- CSX discussed some 350bps of headwinds – QC and real estate driven, to be compensated for by volume and price
- Both expect to show continued solid price improvements – CSX is concerned about the length of this (last?) coal boom and
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- UP yield and (discussed) price has not seen the impact of the contract wins in coal (2) and Swift (beginning this year) and Schneider (beginning next) – watching UP on price will be the thinking man’s 2022 project as they strive to produce industry-leading volume growth
- Both backed up their optimism with roughly 10% increases in Capex, still within their post-PSR ranges, much of it growth-related (some of it inflation, to be sure). You know that makes me smile….
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- Both could have used a bit more openness on their webcasts (on some of the Q&A you could close your eyes and think you were listening to an old earnings call from Virginia); there was little guidance or specifics on volumes much fewer earnings or margins (I am mostly OK with that)
- UP (alone) reported ROIC – which is so important to de-program certain investors from the Cult of the OR – and why not? They reported 16.4%! that compares to 14.3% last year (15% in 2019).
- Although UP discussed safety on an annual basis, and in CEO Lance Fritz’s comments (and was a big part of his speech at NRC, see my earlier report)only CSX reported quarterly numbers
- Both sort of promised Investor Days (yay), UP more directly and CSX more generally (all details TBA)
- Neither discussed the all-important national labor negotiations (which apparently are going as well as baseball’s, it’s unfortunately reported) nor much on the STB
- Given all of those similarities would you have expected UNP shares to outperform (+2%) this lousy (S&P 500 ~-2%) market since January 20 – and for CSX to under-perform (-4%)??
Specific to CSX:
- Congrats to Sean Pelkey for having “Interim” taken off of his title and becoming the CFO
- Strange that there was no discussion or Q&A on the Pan Am deal – perhaps because the listed anticipated growth of ~2% is so small – but elsewhere CEO Jim Foote noted that they had satisfied most of the outstanding conditions with outside parties (Amtrak, Vermont rail) leaving a few open – notably (to me) CP – where Jim seemed to question their motivation and where CSX is so far the only carrier not to weigh in on CPKC
- Jim neatly bypassed the question on succession, and even invoked a little Rickey Henderson in doing so!
Specific to UNP
- UP has a train-robbery problem in LA!
- UP said its productivity “shortfall” of some $150mm (FY21) was deferred, and that it could come close to its forever goal of G55 (a 55% OR) this year – but they didn’t see a link to improving Trip Plan Compliance metrics to improved margins, which for me is a very short term, almost Cultish, answer….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18