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There are some stories I just can’t wait to write, like the Alibaba or Facebook IPOs. They are stories that you know are going to happen before they actually happen. This is one of them. CSX (NYSE:CSX) is a Ft. Lauderdale-based U.S. transportation and logistics company more popularly viewed as a railroad. Late this afternoon CSX released its third quarter results to generate a second consecutive day of gains in its share price, albeit today’s has been after the closing bell.
You just had to know that today would be special because yesterday CSX rebuffed an M&A offer from its Canadian cousin, CP Rail (NYSE:CP). The announcement of the offer sent CSX shares up more than 10% in early trading yesterday from 29.93 to 33.51. The share price drifted lower during the day, closing at 31.70, likely as a result of the company’s apathy toward the CP offer.
The Report
No doubt the CSX board did not want to dim the sparkle of today’s report which, of course, we all knew was coming. For one thing, it sure makes CSX look more valuable. The company reported record third quarter revenue, operating income, net earnings and earnings per share.
- Revenue for the quarter increased 8% from $2.98 billion to $3.2 billion.
- Operating income grew by 16% from $840 million to $976 million.
- Net earnings swelled by 12% from $455 million to $509 million
- Pre-tax earnings were up 15% from $709 million to $813 million
- EPS increased 13% from 45 cents to 51 cents
There is no way the CSX board would have wanted an M&A offer from anyone to eclipse the news contained in this report. The sheer fact that news of the offer was made public, although obviously received well by investors, was enough to distract from the report itself. How the board feels emotionally or strategically about that remains to be seen.
The Offer
The details of the offer itself are hardly relevant compared to what the offer would mean from an operational standpoint.
- The new company would become the largest owner of Class 1 railways in North America, with 35,000 miles of track.
- The new company would have about $18 billion in annual revenue.
- The new company would add a degree of agility in its ability to more freight across the country that neither currently possesses, but which both aspire to have.
The Hidden Gem
What is not as readily seen is the benefit that the new company will gain by having an increased capacity and ability to transport over 200,000 rail tanker loads of oil from the Albertan oil sands and the rapidly expanding Bakken Shale oil field in North Dakota. (See my article earlier today about Magnolia Oil and the Bakken field.)
The new company would be able to operate more efficiently and at lower costs than its competitors moving the precious oil cargo to refineries on the east coast. There is an oil boom in North Dakota. Someone has got to find a better way to get the supply to where the demand is. That is why rebuffing the CP offer is likely to be only temporary.
Note: Writing two articles today related to the Bakken oil field was not my intention when my day began. The intertwining of two apparently unrelated stories does, however, warrant investor awareness.
