The Zacks Analyst Blog Highlights: CSX Corp, T-Mobile US, AT&T, Verizon Communications and Sprint

Apr 16, 2014, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, April 16, 2014 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the CSX Corp (NYSE: CSX-Free Report), T-Mobile US, Inc. (NYSE: TMUS-Free Report), AT&T, Inc. (NYSE: T-Free Report), Verizon Communications Inc. (NYSE: VZ-Free Report) and Sprint Corporation (NYSE: S-Free Report).



Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday's Analyst Blog:

CSX Earnings Plow Through the Polar Vortex

U.S. railroad transporter CSX Corp (NYSE: CSX-Free Report), reported earnings after the bell, posting an EPS of $0.40, and revenues of $3.0 billion. The EPS was ahead of the Zacks Consensus Estimate of $0.38, and revenues came in just above the Zacks Consensus revenue of $2.98 billion.

The major concern going into earnings was the total impact of this winter's Polar Vortexes had on the company's top and bottom lines. The increased snow, and infrastructure maintenance caused higher operational costs for the company. During the Polar Vortexes, CSX had to increase both crew members and the total number of operating locomotives, in order to remove the snow off the tracks, and to do weather related maintenance projects. Due to the weather, CSX saw overtime increase of 50%, causing increased operational costs; which accounted for about one third of the total company's operational costs. Moreover, with the increased usage of locomotives, fuel expenses have risen as well. Another knock to the operational costs. Finally, the horrible winter weather also slowed down their shipping times, which therefore saw fewer deliveries than in previous fourth quarters. 

Management stated that, "For the quarter, CSX saw operational income decline 16% to $739 million, and the operating ratio increased 520 basis points to 75.5%, primarily due to the impact of harsh weather. CSX estimates that weather-related disruptions increased expenses by approximately six cents per share, and impacted revenue contribution by about two to three cents."

On the positive, management has seen the demand for core railroad products increase over the past few weeks due to depleted supplies. The most common items where demand has increased is in the coal and grain shipments.

Previously, Natural Gas has superseded coal in demand due to its low prices, but with Natural Gas storage levels becoming lower, and the subsequent price increase of Natural Gas, the demand for coal has increased. CSX estimates that if Natural Gas stays above $3.50 per gallon, about 50% of CSX's domestic coal business will remain profitable. And as Natural Gas prices increase, CSX's domestic coal business becomes more profitable.

Looking forward, management "expects modest full-year earnings growth for 2014 on the strength of broad-based merchandise and intermodal gains, and an improving domestic coal environment." Moreover, "the company remains confident in its ability to sustain double-digit earnings growth and margin expansion for its shareholders in 2015 and beyond." Finally, management announced that its Board of Directors have approved a 7% increase in the company's quarterly dividend; raising from $0.15 to $0.16, as of June 13, 2014.

Will T-Mobile Take Down Telecom Stocks?

The latest buzz taking the wireless industry by storm is T-Mobile US, Inc.'s (NYSE: TMUS-Free Report) decision to abolish overage fees, unfolding the company's latest strategy under the Un-carrier move it started last year. This implies that customers of T-Mobile US will no more be required to pay extra charges for using voice, text or data service beyond their subscribed plan.

While the strategic decision is a welcome change for wireless users, it also calls for heightened competition and price war against major national players like AT&T, Inc. (NYSE: T-Free Report), Verizon Communications Inc. (NYSE: VZ-Free Report) and Sprint Corporation (NYSE: S-Free Report). Further, it also presages a radical change in the pricing model of the industry, as these charges contributed significantly to the top line of the carriers.

T-Mobile in its attempt to fortify its position in the U.S. telecom industry eliminated annual service contracts. With the introduction of its Simple Choice plan last year it began gradually axing overage fees.

The company in its press release mentioned how 20 million Americans were affected by overage charges in 2013 and the top three players made around $1 billion by levying these fees.

T-Mobile CEO John Legere, in his statement, took a clear stance on discarding overage fees and highlighted it as a predatory practice undertaken by wireless carriers. He also challenged other big players to abolish their overage fees that impose an added cost burden on consumers.

However, the street remains wary of T-Mobile's strategic step as the company's share price went 1% down to $26.74 at the end of trading on Monday. We believe that in a market where prices remain highly competitive and every pricing strategy is imitated by close competitors, it will be difficult for other players to remain unaffected by T-Mobile US's new move.

This indicates that we are to see more such changes in pricing policies of other companies in the coming days, which are likely to affect their overall revenue models. Especially for small carriers, the decision will mean a drastic change, which can hardly be affordable given the scale of operation and revenue generating abilities of these companies. As a result, we see a significant headwind hitting the market valuation of some of these telecom companies in the near future.

How the new changes will be accommodated by other carriers will presumably decide the market movements of these stocks. We believe that while T-Mobile US has set a new trend by axing overage charges to lure customers, following it as an industry norm and adopting a new pricing model by all telecom carriers will depend upon the long-term viability of such changes.

While AT&T currently sports a Zacks Rank #2 (Buy), T-Mobile US, Verizon and Sprint carry a Zacks Rank #3 (Hold).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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