CSX Corporation (CSX – Analyst Report) reported fourth-quarter 2015 earnings of 48 cents per share, beating the Zacks Consensus Estimate of 46 cents.

Revenues of $2,781 million however fell short of our estimate of $2,916 million and declined 13% year over year owing to a substantial decline in coal volumes. Fourth-quarter operating income fell 12% year over year to $791 million. Meanwhile, operating ratio (defined as operating expenses as a percentage of revenues) was 71.6% compared with 71.8% in the year-ago quarter. Meanwhile, operating expenses reduced 13% year over year to $1,990 million.

Segmental Performance

Merchandise revenues fell 7% year over year to $1,785 million in the quarter owing to a 5% volume contraction. This was largely a result of a 22% revenue decline at the Metals segment.

Coal revenues deteriorated 38% year over year to $449 million on a 32% reduction in volumes. The decline in volume was the result of softer global coal demand and declining fuel prices.

Intermodal revenues dropped 4% year over year to $446 million. On a year-over-year basis, volumes increased 4% and revenue per user declined 8%.

Other revenues grossed $101 million, down 23% year over year.

Liquidity

The company exited the fourth quarter with cash and cash equivalents of $1,438 million compared with $961 million at the end of 2014. Long-term debt totaled $10,683 million compared with $9,514 million at the end of 2014. At the end of 2015, net cash from operating activities stood at $3,370 million versus $3,343 million in 2014.

Guidance

CSX foresees a decline in earnings per share in 2016 from 2015 levels while operating ratio is estimated at the mid-60 range.

Our Take

We believe that declining oil price has compelled most power plants to substitute coal for cheaper natural gas. Moreover, weaker foreign exchange rates against a stronger U.S. dollar may continue to hurt coal exports for CSX.

In addition, regulatory and competitive pressure from railroad operators like Kansas City Southern (KSU – Analyst Report), Norfolk Southern Corporation (NSC – Analyst Report) and Canadian National Railway Company (CNI – Analyst Report) may further dent profits.

Despite such headwinds, CSX is banking on a number of profitable factors that include favorable rail industry pricing, recovery of the construction sector, ongoing truck-to-rail conversion, and expansion of network and terminal capacity. Additionally, the company’s focus on operational improvement is expected to boost results.

CSX currently carries a Zacks Rank #4 (Sell).