CSX Corp. (CSX) posted a 23% drop in third-quarter profit on continued sluggish freight demand, but the results topped Wall Street's expectations and the company predicted that the worst of the recession is over.

Shares of CSX, the No. 3 U.S. railroad and the first of the top railroads to report quarterly results, climbed 2.6% to $45.45 in after-hours trading. The stock is up by about a third this year.

CSX said freight volume slumped 15% in the third quarter compared to the year-ago period, declining "across the business" and fueling the bulk of the big drop in profit.

But the 15% volume slide marked an improvement nonetheless from the second quarter's 21% year-over-year decline. CSX said the rate of decline slowed "in nearly all markets" in the third quarter.

The trend bodes well for the rail sector heading into the heart of the third-quarter reporting period, as well for the broader economy. Top railroads are considered barometers of overall economic activity because of the variety of goods they transport.

CSX Chief Executive Michael J. Ward said in a prepared statement that the third-quarter volume trend "reinforces our view" that the railroad likely has weathered the worst of the recession.

Ward singled out coal volumes as a sore spot, however, warning that demand for coal could be down "well into 2010." CSX previously has blamed falling coal volumes on reduced usage by electric utilities and lower natural gas prices, as well as on reduced coal exports due partly to lower steel production in Europe.

CSX earned $293 million, or 74 cents a share, in the third quarter, down from $380 million, or 93 cents a share, a year earlier. Revenue dropped 23% to $2.3 billion.

Analysts surveyed by Thomson Reuters expected per-share earnings of 71 cents on revenue of $2.32 billion.

Ward said efficiency gains and cost-cutting efforts continued to help CSX in the quarter, with operating costs down 24%.

He also noted that "core pricing remained strong and consistent with prior quarters." The trend indicates that the perceived cost-effectiveness of rail over other transport modes has enabled railroads to continue to push through price increases despite volume declines.

The transport sector overall has experienced a precipitous drop in freight volume since late last year as the ongoing recession has sapped demand for all manner of goods.

But a number of top railroad executives have noted in recent weeks that freight volumes have been improving, although they also have voiced skepticism regarding chances for a dramatic rebound. Last month, Ward described the shape of recovery as likely "an elongated L," meaning he doesn't expect a quick recovery.

-By Bob Sechler, Dow Jones Newswires; 512-394-0285; bob.sechler@dowjones.com