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Rails Enter Earnings Station: CSX Preview

CSX will report after the bell on Tuesday, the first of the rail stocks to report earnings -- and the first look at the pace of the recovery in the U.S. rail sector.



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(CSX) - Get CSX Corporation Report

will be the first major rail operator to report first-quarter earnings on Tuesday after the market close. The last time the railcars came into earnings season, CSX delivered a lump of coal to investors.

Actually, the problem was that there was not enough coal being delivered by way of rail operators.

CSX shares slid after the rail company sought to temper market expectations with its coal outlook in its January earnings. CSX shares fell as low as $42 in the weeks after its earnings. CSX has since recovered to a price near its 52-week high of $53.47.

But will Tuesday's after-market earnings report send CSX shares higher, or will coal continue to provide a black mark for rail investors?

There's actually a lot more to the CSX report than just the coal, even though it was the coal outlook that drove the rail stock down in January.

Since CSX already provided a sober note on coal traffic, and coal demand remains relatively weak, so as long as CSX doesn't provide any more negative outlook than it provided in its last earnings, investors may be more specifically focused on the coal export story as a potential driver, according to Dahlman Rose rail analyst Jason Seidl.

In the case of CSX, the coal outlook can also be mitigated by the success the rail operator is experiencing in its intermodal company, and that might provide a read-through for the rail industry. CSXI, the parent company's intermodal shipping arm, has been rebounding while coal remains weak.

"If CSXI can start funneling traffic to the CSX bottom line, that's a good sign for the rest of the industry," the Dahlman Rose analyst said. An increase in CSX profits derived from intermodal would not just be an indication of gains made by the rails against the trucking industry, but a larger sign of macroeconomic recovery, the analyst said.

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There are signs that the rail shippers are optimistic, too. Dahlman Rose's most recent survey of rail shippers, released on Monday, indicated that the rails expect 9% growth over the next 12 months.

The economic rebound also may place more pressure on the rails to answer an important question from investors: "What have you done for me lately?"

Canadian National Railways

(CNI) - Get Canadian National Railway Company Report

already reinstated a dividend, and the pressure will be on rails to pay out dividends to investors and to consider share repurchase programs to support their stock price.

"The last time I checked, the railroads were not banks," Dahlman Rose's Seidl said, referring to the record level of cash on which the rail operators are sitting. "The economy is picking up and car loading numbers are getting better, so investors may start to expect rails to put their money where there mouth is, or investors may quickly run out of patience" Seidl said.

The Street is expecting 69 cents per share earnings from CSX. Dahlman Rose is expecting earning of 72 cents -- and the analyst revised its rail estimates upward in mid-March. Dahlman Rose revised its rail guidance for all the major operators based on three factors: outlook on overall rail cost structure, labor management techniques during the recession that avoided layoffs, and the ability to rebound alongside the larger economy by bringing cars currently in storage onto the lines cost effectively.

-- Reported by Eric Rosenbaum in New York.

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