Avoid CSX Corporation on High Valuations and Uncertainty

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CSX stock - Avoid CSX Corporation on High Valuations and Uncertainty

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CSX Corporation (NASDAQ:CSX) finds itself at a crossroads. The company reported strong profit growth in fiscal 2017 and witnessed a large increase in its stock price over the last couple of years. Unfortunately, the year ended with the unexpected passing of its CEO, whom many regarded as a turnaround king in the railroad industry.

Due to its high valuation and uncertainty regarding the top leadership, investors would do better by avoiding CSX stock in the near term.

CSX is the largest railroad in the eastern United States. It transports goods in 23 states and two Canadian provinces. Still, it holds a market share of about 50% in the areas where it operates and directly competes with Norfolk Southern Corp. (NYSE:NSC) It does not operate in the western two-thirds of the country like Union Pacific Corporation (NYSE:UNP) or the BNSF Railway Company, now owned by Warren Buffett’s conglomerate, Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B)

Uncertainty for CSX Stock

For part of the 19th century, railroad stocks were the Amazon.com, Inc. (NASDAQ:AMZN) or Tesla Inc (NASDAQ:TSLA) of their day. At the time, investors willingly paid large multiples to take part in what was then an industry on the cutting edge. The heyday of the railroad industry remains in the distant past. However, CSX hasn’t needed the latest technology and high valuations to generate headlines lately.

The recent death of CEO E. Hunter Harrison has created some controversy. Our own Dana Blankenhorn called Harrison “the Steve Jobs of railroading” as he played a large role in growing the value of CSX stock, despite his tenure of just nine months.

The company announced Harrison was taking a medical leave the day before his death. However, the company offered few clues about Harrison’s declining health until his passing was announced. This created a great deal of uncertainty for owners of CSX stock.

The stock saw a 10% dip following the announcement in mid-December. Still, the stock recovered this loss within a couple of weeks.

CSX Growth Story Continues

While the leadership change creates uncertainty, CSX’s growth story continues.

The company recently reported both fourth-quarter and full-year earnings. For fiscal 2017, the company reported adjusted earnings of $2.30 per share. This figure is well ahead of the consensus estimate of $2.21 per share. It also substantially improved on 2016 earnings of $1.81 per share.

Earnings for the fourth quarter also beat expectations. Still, the stock fell as revenues fell 6% year-over-year. At $2.86 billion, revenue fell short of the $2.9 billion analysts had estimated. Other developments have made CSX a stock to avoid for now.

Watch Valuations on CSX Stock

Also, the CSX stock price has become high, at least for an old-line industrial stock. The stock traded in the low $20s two years ago. Now, it has increased by over 60% in the last 12 months. Today, the stock price nears $60 per share. That has placed the company’s price-to-earnings (PE) ratio at 30. While the forward PE will come in at 20 on improved earnings, stock price growth remains well ahead of earnings.

However, investors should keep CSX stock on their watchlists. A PE in the teens would make this stock a buy again. Moreover, CSX has increased its dividend for 13 consecutive years. Given higher earnings, most expect this streak to continue in 2018 and beyond. While the dividend yield of 1.35% remains below S&P 500 averages, the continual record of increases can be a cash cow to long-term investors.

Bottom Line on CSX stock

A high PE ratio and doubts about the company’s direction make CSX stock one to avoid for now. Hunter’s surprise passing, as well as the large stock price increase in what’s usually a slow-growth sector, cast doubt on the equity.

However, if the price falls or profits maintain their high growth rate, investors should look again at this stock.

Rail transportation remains the least expensive method of moving freight overland. Additionally, few industries have higher barriers to entry than railroads, a fact which affords them a great degree of pricing power. Over time, population growth will also create more demand for freight transport.

Warren Buffett bought BNSF for many of these reasons. Investors would do well to buy CSX as well, but only if they can buy it at a reasonable price.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/avoid-csx-corporation-csx-stock-valuations-uncertainty/.

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