What happened
After a sharp drop alongside most industrial stocks in March, shares of railroad CSX (CSX 0.75%) popped 15.6% in the month of April, according to data provided by S&P Global Market Intelligence.
While investors seemed to have found value in CSX's stock price after its drop in March and the soon-to-follow government's economic stimulus package, another big trigger for the stock's jump was CSX's first-quarter earnings report.
So what
The coronavirus outbreak and resulting lockdowns worldwide that's brought manufacturing activity to a grinding halt has unsurprisingly hit railroad traffic. So expectations from CSX's first quarter weren't really high, especially since some of CSX's end markets like coal were already trending weak for some quarters. On April 22, CSX reported a 7.7% drop in net income driven by 5% lower revenue.
Image source: Getty Images.
Yet CSX's operating ratio hit a record first-quarter low of 58.7% -- a number investors cheered, sending the stock soaring. Operating ratio measures a railroad's operating expenses versus its revenue, so the lower the ratio, the better it is. In Q1, CSX's operating expenses declined 7%, thereby driving its operating ratio lower.
During its Q1 earnings conference call, management also highlighted some of the steps CSX had taken to deal with the COVID-19 pandemic. For instance, management invested some cash into "safer" government funds while raising $500 million in debt. Management further convinced investors that CSX should be able to generate enough annual free cash flow to easily fund the $1 billion worth debt it has maturing over the next three years.
Now what
To be fair, the second quarter could be even tougher for CSX as the real impact of COVID-19 lockdowns reflect on its business. Yet that doesn't dilute the fact that railroads keep the economy moving, which is something investors might want to keep in mind when they invest in a stock.
