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A tale of two railroads
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July 29, 1998: 1:26 p.m. ET
CSX hurt by container bottlenecks; Norfolk benefits from increased focus
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NEW YORK (CNNfn) - The two largest railroads on the East Coast, which are in the midst of absorbing the assets of Conrail Inc., reported sharply contrasting profit pictures for the second quarter Wednesday.
The mixed results of CSX Corp. and Norfolk Southern Corp. underscore the increasing concern about industry-wide overcapacity triggering bottlenecks among the nation's largest freight railroads.
Because of the strength of the U.S. dollar, imports -- particularly from Asia -- have rocketed to record levels, creating more traffic than the nation's freight rail system can handle.
"They're not really equipped to handle such a surge in volume," said James Winchester, analyst at Lazard Freres.
For example, imports from Asia into the nation's busiest port, Long Beach, Calif., in June increased 13.4 percent from a year earlier while Los Angeles, the nation's second-busiest, experienced a 19 percent rise.
"There's an unprecedented imbalance. And it's going to get worse," Winchester said.
In June, shipments of 20-foot-equivalent units -- an industry benchmark -- soared to 355,000 containers, reflecting a 10 percent increase from the busiest month of 1997 when 332,000 containers went through the Port of Long Beach. June typically isn't as busy as July and August for container shipments.
"If you think this is a tough environment, the fire hose is going to be on full stream in the third quarter," Winchester said.
Indeed, the effects of the excessive traffic were seen already last week in quarterly results of West Coast giants Union Pacific Corp. and Burlington Northern Santa Fe Corp.
But complicating the situation for Richmond, Va.-based CSX Corp. is its direct exposure to the container shipments segment through its Sea-Land Service subsidiary, the nation's largest shipping company.
For the quarter ended June 26, CSX Corp. recorded a 33 percent drop in second-quarter profits to $151 million, or 68 cents a share, from $227 million, or $1.03 a share, a year earlier. That's below the 78 cents that analysts had anticipated, according to First Call.
Excluding one-time items related to the Conrail acquisition, earnings totaled $187 million, or 85 cents a share, compared with $245 million, or $1.11 a share.
Revenue remained flat at $2.64 billion compared with $2.68 billion.
For the first half of 1998, net income totaled $242 million, or $1.09 a share, on revenue of $5.2 billion.
"These results are disappointing. Our rail and container-shipping businesses are taking steps to regain earnings momentum by lowering costs and improving efficiency," CSX Chairman and Chief Executive John Snow said.
Shares of CSX (CSX) eased 1/16 to 42-5/16 in Wednesday trading on the New York Stock Exchange.
Yet the weakness experienced by CSX highlights the management focus of its Norfolk, Va.-based neighbor, Norfolk Southern Corp.
Since the beginning of the year, Norfolk Southern has sold off its consumer trucking unit, North American Van Lines Inc., for $200 million to concentrate on its core railroad business.
"They're not as directly affected by the West Coast traffic," Winchester added.
For the second quarter, the company reported net income of $187 million, or 48 cents a share, down slightly from $190 million, or 50 cents, in the year-earlier period.
Analyst had anticipated 47 cents.
Excluding the costs associated with Conrail, net income would have been $224 million, or 58 cents a share.
Revenue rose 1 percent to $1.08 billion from $1.07 billion.
For the first half of the year, net income totaled $416 million, or $1.09 a share, on revenue of $2.1 billion.
Norfolk's stock (NSC) rose 3/4 to 29-9/16 on the Big Board.
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Norfolk Southern
CSX
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