(CSX) (CSX Corporation)
Overview of the Company - CSX is a rail service transportation company. It transports anything from cars, minerals to food products. It operates almost 20,000 miles of rail network mostly east of the Mississippi and in canada. CSX is known for beating out returns made by the S&P 500 for the last 10 years. It doesn't stop there, CSX has vastly outperformed the S&P for 40 years while paying a steady dividend.
Fundamental Analysis - Rail is the most efficient and environmentally friendly way to transport anything per ton. Whatever it is, on the bases per ton, rail is the most cheap and environmentally friendly way to transport on land. Combine that with the fact that with record high savings levels and the relatively good state of the economy and consumers, America could be set to have a booming economy in the coming years. The best way to ship those goods is by rail. Hence, the reason CSX could be a great buy for the coming years if you're sick of buying the S&P 500 where a quarter of your investment goes into Apple, Microsoft, Amazon, Facebook, Google, Tesla. On top of that CSX has a near similar dividend yield as the S&P.
How (CSX) Stacks Up to Competitors - We will be comparing CSX to Union Pacific (UNP) and Norfolk Southern (NSC). Union Pacific is the largest of the group with over a 135 billion dollar market cap while CSX and NS are 70 and 60 billion respectively. Their P/E ratios are in the low 20’s while the S&P trades at around 30. However, this is a much slower sector of the economy. They all have around the same profit margin but UNP has a high return on equity. They all have seen about 30% revenue growth over this quarter of last year, but UNP lags in their profit growth from this increase in revenue. CSX and NSC both stand out with more than 100% quarterly earnings growth (year on year) while UNP sits below 60%. The similarities continue as all three trade at around 5 times book value. These companies trade very similarly and have similar balance sheets and valuations. The difference between these three companies can very well come down to where they operate and personal preference.
Bull Case - With record high savings rates and an economy ready to explode CSX is poised to bounce from its recent underperformance. As the American consumers seek to spend their savings and hard earned money into the holiday season, CSX, an economically cyclical company is on track to make big profits.
Bear Case - Many people are still unemployed during this stage of our reopening. Not to mention new Covid scares and variants spreading, slowing our economic expansion. It may be wise to focus on other areas of the market as maybe the cyclical parts of our economy are not ready for full steam ahead - which CSX desperately needs. With its big overhead and debt, CSX truly benefits from a booming economy - one that we may not see for a while. CSX may be able to stay above water, but there are many other sectors better positioned for a positive outlook, even just buying an ETF that tracks the tech heavy S&P may yield greater returns.
Valuation and My Price Target - It is hard to determine a price target for CSX as it truly depends on whether we see a booming economy and if consumers are willing to spend their stimulus or savings money. CSX will see higher revenues, and therefore higher EPS numbers, but it may not substantially enough to push the stock significantly higher. I believe that a year from now, a fair target is about an 11% move up from here. This is a fair return, but considering the S&P has averaged over 14% the past decade, I believe CSX will underperform the market. My price target for CSX is 34.35.
The Verdict - BUY HOLD SELL
Buying any name in this group is a bet on the economy. However, each stock comes with its own risk.With recent turmoil, instability, political issues and the economic worries on the west coast, specifically California, we could see an underperformance from UNP in the group. Prices in California are too high and too many big companies are trying to leave. CSX trades at an identical level with the others but offers the smallest dividend. NSC is the smallest of the group and therefore is the most sensitive to an economic downturn. My advice is to be invested in the S&P rather than these companies. However, if you do not own very many cyclical companies and need a stock that will benefit greatly from a growing economy, I would buy about a quarter of your intended position now, before the holiday season. CSX has recently breached its 200 day moving average and it is well on its way to its 300 DMA. If you can get CSX at around 30, I believe that would be a great buying opportunity to initiate a position in the company. All three companies are mere dollars away (UNP is around 50 cents away) from their 300 day moving average and a meaningful bounce could signal a bottom in these companies. Then, in a few months if they don't perform and start trading at an egregiously low level, it may be time to evaluate and buy more. However my verdict for the group at the moment is a HOLD.
*all data provided by yahoo finance and nasdaq.com