MACRO THOUGHTS FROM A RAIL INDUSTRY INSIDER
We’re very fortunate to have a broad reach into corporate America and many of the best minds in business today. We recently discussed some macro issues with Oscar Munoz, CFO of CSX. The rail industry is one of the very best indicators of economic growth and CSX is a leader in this important sector of the global economy. Oscar was kind enough to share his opinions on the rail industry and what CSX sees in store for the macro economy going forward:
Cullen Roche: There are few indicators that are more foreshadowing of economic growth than the rail industry. We’ve seen a fairly robust rebound in rail traffic trends since 2009, but volumes have been a bit more volatile in early 2011. What do you think the rail industry is telling us about the global economy today and what does CSX’s business say about the current state of the US economy?
Oscar Munoz: We continue to see positive economic trends in an expanding economy, supporting profitable growth across all major markets that we serve. Looking ahead, both discussions with our customers and review of key leading indicators suggest healthy economic growth will continue throughout 2011 and beyond.
CSX’s overall volume growth in the first quarter increased 7 percent versus the same period last year. Although the industry experienced some limited volume volatility due to weather in the first quarter, global and domestic demand is strong.
CSX’s volume continues to grow in nearly all of our markets, led by expansion of our intermodal business; increased shipments within most of our merchandise markets, including automotive, emerging markets, and forest products; and greater demand for export coal.
Cullen Roche: CSX is in a unique position to benefit from the current environment of surging commodities and a recovering global economy. Can you explain why you believe CSX is uniquely positioned to benefit in the current tumultuous global economy?
Oscar Munoz: We certainly do have a unique vantage point when it comes to changes in the American economy – and the global economy as well. CSX’s business is diversified across almost every product that industrial America needs. This business model drives a number of benefits for us in an expanding economy and also helps us to weather shifts in supply and demand across the global economy.
Industrial products and inputs, such as metals, plastics, and intermediate goods are in greater demand as the manufacturing sector increases production to meet the needs of a growing population. Not surprisingly, shipments of finished products are also on the rise. For example, automobile volume for CSX increased 20% year-over-year in the first quarter alone.
We continue to see strong growth in our intermodal market. Intermodal revenue increased 4 percent on record first quarter volumes. Of that total intermodal business, international volume grew 24 percent due to the strengthening U.S. economy and the addition of new international customers as a result of expanded service and network offerings.
As the world supply of coal tightens and demand increases in developing countries, the U.S. is positioned as a stable supplier and has strong reserves of metallurgical coal. Europe remains the largest importer of U.S. coal; however Asia’s demand is growing rapidly and expected to continue, as are shipments to South America.
Cullen Roche:There has been much controversy over the Fed’s stance on monetary policy. Has CSX noticed any direct impact from the Fed’s current stance on monetary policy, either positive or negative?
Oscar Munoz: Although monetary policy is one factor that can influence global macroeconomic trends, true changes in supply and demand have a greater influence on CSX. As mentioned above, we are in the business of moving the goods that people, companies and manufacturers need. A growing global economy and the evolution of the global supply chain are major factors in the increasing demand for CSX services.
Cullen Roche:Europe and China are important drivers of future growth for the rail industry. How has the Euro crisis and the Chinese inflation threat impacted CSX – if at all?
Oscar Munoz: Fluctuation in international currency, like changes in the American dollar, impacts our business much less than changes in actual demand. We continue to see strong demand for steam coal shipments to Europe despite the Euro crisis. As mentioned above, while Europe remains the largest importer of U.S. coal, Asia’s demand is growing rapidly and we continue to see Asia as one of our key growth markets.
Cullen Roche:Margin compression has become an increasing concern as unit labor costs begin to rise again and commodity price pressures grow. CSX has managed costs extraordinarily well in recent quarters. How serious is the threat of margin compression to CSX and growth going forward?
Oscar Munoz: Cost management is vital in any industry and CSX is delivering strong incremental margins. Our employees are driving technological and process improvements across the company. While cost pressures are plentiful, our focus has been to ensure our service product continues to improve – allowing us to price to the value of the service we provide – while expanding market share. Confidence in our approach is the foundation of our long-term guidance of achieving a 35% operating margin by 2015, up from 29% today.
Good stuff Cullen. Thanks for passing that along.
Sounds pretty bullish in general. Cullen, what are your thoughts on this comments?
They’re probably a bit more optimistic than my thoughts, but I am still in the general belief that the deficit is large enough to offset the effects of the balance sheet recession and that the US economy can continue to grow at a modest pace. Margin growth is being driven by cost cuts and labor cuts and revenues are being driven by strong international growth. All in all, it’s not a horrible environment for equities. The big risks remain deficit cuts and international risks – particularly a decline in Asian growth….that’s the 30,000 foot view from my perch.
at $3 in fuel to move a ton of frieght 400 miles (nothing quite like steel wheels n enertia) rail is extremely efficient….you would think the windmill crowd would be pumping them………too bad they are hamstrung by archaic union rules.
off topic but back to a prior discussion on vaccines n autism ….you cannot trust the drug companies to test their own drugs….the scientist that SUPPOSEDLY proved no link there, brought up on fraud and corruption charges(heyooo):
http://www.naturalnews.com/032216_Thorsen_fraud.html
for the other side: see
The curious case of Poul Thorsen, fraud and embezzlement, and the Danish vaccine-autism studies
http://www.sciencebasedmedicine.org/?p=12148
bottom line remains: industrialists & politicians can run circles around research, any time they want;
research just report results after the fact, it doesn’t really help us survive real time challenges – only practice at actually mapping research results to reality does that (and only practiced group agility delivers Adaptive Rate)
having personally witnessed this when my buddy’s son started screaming and acting very strange 6 hours after his MMR shot…hospital and doctors never had a reason…..he never acted the same again,like he was in his own world…. and as he got alittle older he is autistic….its not a coincidence, it happens like this tooo many times….its like alzhiemer’s at age one…..you cannot imagine in your wildest dreams what it is to deal with this your whole life.
so it is hard for me to look at the other side of the coin….this side stares me in the face.
other than for a car wreck, you can have your science when applied to the human body.
Appreciate this piece. But as a former Wall St analyst, keep in mind I rarely, if ever, talked with a CFO or CEO that was not “bullish” about their business and their opportunities.
my thought exactly; he has a fiduciary duty to say bullish things about his company’s prospects;
not useful for an interview unless you ask him for his view on things unrelated to his own company
that’s why good journalists are not good investors, and vice versa
I disagree. I hear otherwise quite often.
Indeed. You always have to consider the source.
Interestingly enough, today we also get this from the CEO of Wal-Mart: “Wal-Mart’s core shoppers are running out of money…”
For the full article: http://money.cnn.com/2011/04/27/news/companies/walmart_ceo_consumers_under_pressure/index.htm
Maybe the reason the rails see growth ahead is because they have a contingency plan to rent out their box cars to all those Wal-Mart shoppers who will soon no longer to be able to afford the rent on their homes.
Per CR: “They’re probably a bit more optimistic than my thoughts…”
Does anyone really expect Mr. Munoz, CFO of CSX, to be anything other than optimistic?
Many thanks for this interview … it’s informative. But let’s not lose sight of who provides his paychecks and stock option grants.
Margin compression ??? Union Pacific earns 40% of its pulling 100 unit double deck trains from the long beach port to middle america. When the new panama canal opens in 2 years 1, just 1, container ship will carry that much to, probably, gulf ports where there are 5 and not 2 major trunk railroads. That is margin compression. Further, scrap metals are by far the leading indicator in terms of the direction of the economy 3-6 months hence. Last week showed a yoy drop of 17% in scrap metal rail car shipments……………Roche doesn’t ask the correct questions.
What are the right questions?
Walmart article:
http://money.cnn.com/2011/04/27/news/companies/walmart_ceo_consumers_under_pressure/index.htm
Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.
“We’re seeing core consumers under a lot of pressure,” Duke said at an event in New York. “There’s no doubt that rising fuel prices are having an impact.”
——–
My comment:
Walmart shoppers still have to buy down housing bank balance sheets, even if they are renters. Now, they have to buy goods made in China, that were formerly made in U.S.A. Plus, they have to spend on expensive gasoline, which is driven high in large part due to financialization of commodity markets.
We should get Oscar Munoz and Mike Duke in the same room and watch the sparks fly.
The article also says: “To that end, Duke said he’s not seeing signs of a recovery yet.” Maybe Munoz is just more prescient.
Perhaps Duke is overstating the negative in order to deflect blame for Wal-Mart’s revenues as they perhaps lose ground to Target and others? I don’t know. In any case, there is plenty of evidence besides that the consumer is hurting. And with the”wealth effect” gone, it just makes it worse.
It would be interesting to hear what they say about the chinese rail industry, not only as insight into the economy.
exhibit 25 to my argument. he is responding to DEMAND…
so according to cullen, companies hoarding money (laying off people,eluding taxes, keeping the key component under control akin salaries, refinancing debt at lower interest rates thanks to bernie and his cronies)with profits at record highs , a country bankrupt ( lets see if dollar at historical minimum, high deficits and negative real interest rates is a recipe for growth) and households receiving more in transfers than taxes paid is a sign that this recovery can prolong further before a meltdown. Above all this is a moral crisis, same ideas and people cant change the same mess they created.