CSX (CSX) is up 4% premarket after the company reported better than expected first quarter results and raised fiscal 2017 guidance. The company said the outlook for the second quarter was favorable and raised fiscal 2017 earnings guidance. The company also raised its dividend and announced a new $1 billion share repurchase program.
Railroad legend Hunter Harrison took over as CEO last month. Investors were elated because Mr. Harrison is known for running a tight ship. He is expected to reduced operating expenses to dramatically improve the company's efficiency. He already laid off 3% of the workforce. Importantly, a multi-year strategy with long term guidance will be announced in the second half of the year.
CSX reported adjusted EPS up 38% to $0.51. Revenue for the quarter increased 10%, reflecting volume growth across most markets, overall core pricing gains, increased fuel recovery, and favorable mix. Volume increased 3% and pricing rose 7%. Same store sales pricing (the highest growth since 4Q15 at +3.9%) increased across all major markets (Coal, Merchandise and Intermodal), led by temporal strength in export coal. Continued sequential softening in merchandise and intermodal pricing reflects the cumulative impact of traffic negotiated over the last several quarters in a slowly recovering market.
CSX said the outlook for Q2 was mostly favorable. The company expects 25% EPS growth for the year, which equates to adjusted earnings of $2.26/share this year. Previous management called for more vague ‘EPS growth' and analysts had expected it to come in around 15%. The operating ratio is expected to be in the mid-60s.
CSX said recent changes to the company's operations have already begun to deliver strong returns and are expected to accelerate in the coming quarters. Given this momentum, the CSX Board of Directors approved an increase in the quarterly dividend from $0.18 to $0.20. In addition, the Board also approved a new $1 billion share repurchase program, which management expects to complete by the end of the first quarter of 2018.
Hunter Harrison's first comment on the conference call was "I'm back". The 72-year-old noted that he was exciting to be in Jacksonville, Florida with CSX. He previously ran Canadian National (CNI) and then turned around Canadian Pacific (CP) after a brief retirement. He called for significant improvement in the merchandise segment at CSX and dramatic cycle time improvements.
CSX's valuation reflects the Hunter Harrison premium. The stock is trading at ~22x this year's earnings versus Class I rail peers in the high-teens.