CSX Corporation (NYSE:CSX) demonstrates the ongoing resiliency of the railroad industry. Brought to prominence a few years ago when Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) made a major acquisition in the space, CSX has been on a tear.
Let’s look at the important numbers from the CSX report and see if there is value in jumping in at current prices, and what it might say about the economy.
CSX Earnings
CSX reported $442 million in net income, which is up 11% from $398 million or 40 cents per share from last year. Earnings of 45 cents per share improved from 40 cents year-over-year. Revenue, however, was flat at $3.03 billion. That can only mean that CSX earnings rose because of cost cuts, share repurchases or both.
I’m not a fan of non-organic growth. Indeed, a look at the CSX 8-K SEC filing shows the only operational savings came in the form of $176 million in fuel costs. That’s really awful news, because it means the company’s operational expenses actually got worse, as labor and fringe costs rose $65 million to $879 million.
Yes, CSX operating income, rose $104 million, and net earnings “improved” 11% to $442 million. But keep in mind that CSX reduced share count from 1.008 billion shares to 992 million shares — a 1.6% decline.
So CSX stock is not going to be reflective of earnings growth, exactly. It will reflect earnings surviving in an environment that has turned nasty, as phosphate and fertilizer shipments fell 6% in volume YOY, as did metals.
There is good news on the cash flow front for CSX stock, in that operating cash flow rose from $599 million to $690 million, again the result of the cost cuts. There’s also no danger on the debt side for CSX stock. While CSX has $9.5 billion in debt, interest expense was only $134 million for the quarter. CSX stock also sits on $818 million in cash and short-term investments.
Bottom Line for CSX Stock
Is there any value in CSX stock? As a value investor, I like to look for companies that may be struggling or about to turn around. CSX earnings weren’t great this quarter. The cost cuts resulted in that faux 11% increase in CSX earnings, and FY15 is pegged to increase 10% to $2.11. We have to assume, Considering that analysts only project revenue to grow 0.4%, we have to assume that it’s all going to come from fuel savings.
If fuel prices rise again, CSX earnings are going to look very ugly.
CSX stock now trades at about 17 times earnings. Management increased the dividend from 64 cents per share annually to 72 cents per share, which seems like a ploy to attract investors rather than use the money more effectively. Regardless, that gives CSX a 2.2% yield.
I just don’t see paying 17 times earnings for a company where revenue and earnings are flat, where the economic environment isn’t playing in its favor, where fuel prices could still rise, and where the present administration is unfriendly to businesses like coal.
What should you do with CSX stock? Sell it and move on.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long BRK.B. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
