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Introduction

CSX Corporation (CSX) is a $19.3 billion company in the railroad industry. Market capitalization competitors in this industry include Burlington Northern Santa Fe, Norfolk Southern, and Wabtec Corporation. The railroad industry is up 8.90% over the past year compared to the S&P 500 which is down 7.54% during the same period. Over the past month, the industry has been down 3.54%, while the S&P 500 has been down 3.14%. After a strong sell-off earlier in the past month, there is a strong potential for railroad companies to grow. Evidence comes from a potential high in gas prices, and an appreciative return for railroad stocks once oil futures move lower. CSX’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what CSX produces. According to Reuters, CSX “is a transportation company” that mainly focuses on surface transportation. “Surface Transportation, which includes the Company's rail and intermodal businesses, provides rail-based transportation services, including traditional rail service and the transport of intermodal containers and trailers.” Moreover, the company operates in two main business segments: rail and intermodal. The rail section focuses on regular freight in eastern North America. The intermodal section focuses on uses both trucks and railroads to transport and distribute products across North America.

More specifically, there are connections between rail and trucks for this transportation service. Some investors may worry about rising oil prices, and how the commodity will affect financial reports. However, oil is near a record high due to unforeseeable economic conditions. There is a high possibility oil has hit its peak and will fall, causing an increase in sentiment for companies like CSX. In addition, CSX focuses on transporting “merchandise, coal, automotive, and intermodal.” There will always be demand for each of these products, and therefore, unless something completely revolutionary emerges, there will always be business for this company.

Growth

CSX has illustrated solid growth prospects over the past year. According to Reuters, CSX reported a $10.0 billion revenue product last year. This number is over 4.85% higher than it was the previous year. Compared to the industry’s average of 4.36%, CSX illustrates its capability to perform above average throughout most economic conditions. Norfolk reported only a 0.27% increase. However, CSX’s earnings growth at -2.41% is below the industry’s average of 4.58%. Nevertheless, CSX has had a strong history of earnings. What’s more interesting between both revenue and earnings growth is the five year averages that CSX holds. CSX’s respective five year revenue and earnings are 4.85% and 24.28%. Compared to the industry’s averages of 9.13% and 18.74%, there is strong historical support about CSX’s performance. The same comparison can be made to direct market-cap competitors as well.

Moreover, CSX has kept its costs under control. According to Reuters, CSX has reported gross, operating, and net profit margins of 60.80%, 22.49%, and 12.22% respectively over the past year. Moreover, these numbers are above the company’s five year averages of 58.82%, 17.03%, and 8.70%. The current averages are also better than the industry’s respective gross, operating, and net income averages of 40.85%, 22.32% and 12.22%. Therefore, CSX has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Wabtec reported respective gross, operating, and net income margins last year of 27.18%, 13.22% and 8.04%. Burlington Northern only reported operating margins of 22.06% and net income margins of 11.57%. Therefore, CSX is not only growing very well, but keeping its costs contained.

Compiling all this information together and investors comes across ROE. Over the past year, CSX reported an ROE of 13.91%. Therefore, out of all shareholder equity, more than 14% come from earnings instead of debt or stock. This number is respectable to the industry average of 14.47% and competitor averages of 16.88% (Burlington), 20.12% (Wabtec), and 15.14% (Norfolk). Not to mention, CSX’s current year ROE is also better than the company’s five year average of 10.13%. Therefore, CSX has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why CSX cannot continue its success. The same logic applies to CSX’s 4.84% ROA (near average) and 5.39% ROI (near industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. It is true that CSX has a forward P/E ratio of and a forward price to sales ratio of compared to the industry’s respective 16.46 and 2.00, but there is a different picture to consider. Currently CSX shows a 15.43 P/E ratio and 1.89 price to sales ratio. However, because the company has an above average ROE, the valuation is justified. Investors see the company as a strong, growing corporation that is worth the extra share price level to invest in. They foresee higher earnings and growth and will pay more now to reap the benefits. What makes these remarks even more enticing is that firms that aren’t growing so greatly (Burlington Northern), have higher multiples. That idea shows overvaluation, not the idea CSX is currently in. Moreover, CSX has a low PEG ratio compared to other competitors’ numbers.

Efficiency

CSX is efficient. Inventory turnover at 17.71 is excellent compared to other industry market-cap rivals (Wabtec: 6.16) Moreover, asset turnover is also strong at 0.40 compared to competitor figures. Receivables turnover also illustrates a number of 8.54, illustrating cash received every 43 days. In terms of liquidation, CSX’s current ratio is 0.93. Some investors may wonder about such a highly risky figure, but because interest rates are low and CSX is a reputable company, incurring extra cash from loans may not be such a bad idea. The company’s capital expenditures have increased (10.42%), which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 79.95% of all CSX shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

CSX performed well in the past year. The company’s share price has increased 30.54% year-to-year. This type of growth is excellent for a recessionary-type economy, especially considering the oil and commodity issues in the railroad industry. There seems to be some support at the 40 dollar share price range dating back to earlier January 2008. The last time CSX reached this amount the company rebounded and appreciated 13%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, CSX illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.75, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of CSX according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

CSX is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
March 14th, 2008