CSX’s December per-mile fuel surcharge was based on October diesel prices that were $3.68 a gallon. The actual average price was $3.41 and now hovers right above $3.00. ASSOCIATED PRESS
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Like trains themselves—which can take a mile to stop and can’t swerve—railroad operators aren’t very nimble.
But that drawback may result in an unexpected bonanza for the likes of CSX Corp. It will be the first big U.S. railroad to report results for the latest quarter Tuesday and may overshoot. Analysts think it earned 49 cents in the fourth quarter, up from 42 cents a year earlier. Their expectations have risen by just one cent since June when oil prices started their tumble, though.
Some observers have looked at the oil-price situation in a glass-half-empty fashion: The shale boom has overwhelmed pipeline capacity and led to a surge in crude shipped by rail. That has provided a profit boost to outweigh the slump in coal use, a vital freight category for U.S. railroads.
But CSX is among the least dependent on oil shipments and, in any case, there was no evidence of a slowdown in volume recently. While that may change, the overall freight picture looks strong. Nationally, the Association of American Railroads reported that large carriers shipped a little over 4.1 million carloads in the last three months of 2014, an increase of 5.1% year over year.
The other impact of oil’s price slump may be more immediate and beneficial: Railroads, like truckers and parcel services, add fuel surcharges to their fees. In the case of railroads, though, they are based on retail diesel prices with a lag. A rapid drop in prices should cut the railroads’ actual fuel cost immediately and creates a temporary windfall.
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December’s per-mile surcharge at CSX, for example, was based on October diesel prices that were $3.68 a gallon. The actual average price was $3.41 and now hovers right above $3.00. The same benefit will be inconsequential for trucking firms like YRC WorldwideInc. that have much shorter lags in adjusting fuel surcharges.
The boost for operators like CSX will be fleeting, but a pleasant surprise and a reaffirmation of upbeat earnings guidance for 2015 could augment the stock’s recent momentum. Despite the fact CSX now trades on a forward-earnings multiple that is at a 15% premium to its average of the past decade, it may be too early to tap the brakes.
Write to Spencer Jakab at spencer.jakab@wsj.com
