When CSX Corporation (NYSE:CSX) reports quarterly earnings results on Tuesday after the market closes, CSX stock might finally break out from its $75-$80 trading range.
Even though the sentiment on freight train shipping volumes dictates the stock price, the second-quarter 2019 report should reaffirm CSX’s underlying strength. What are some of the highlights investors should expect?
Continued Strength Following First Quarter
CSX reported an EPS of $1.02, up 31% year-over-year. Revenue growth of 5% and an overall 2% decline in expenses drove profits higher in the first quarter. The operating ratio improved to 59.5%, down from 63.7%. Adjusted free cash flow grew 33% to $866 million as capital investments fell. CSX benefited from growth in chemicals but offset by LPG, fly ash, and sand shipment declines.
Click to Enlarge Strong truck and SUV demand drove revenue from automotive. Only the fertilizer and intermodal segments experienced lower year-over-year revenue in the first quarter.
For the full-year 2019, CSX expects revenue growth in the low single digits. It will keep to a disciplined spending regime and forecasts its operating ratio at below 60%. Though finding efficiencies is expected, CSX will continue focusing on finding ways to improve services.
In the last quarter, the company appointed a Vice President of Marketing and Strategy and a Vice President of Sales and Customer Engagement. These roles are needed to lead a team focused on finding creative ways to address the transportation needs of its key customers. The VP of Marketing and Strategy will make use of deep research and analytics to find new market opportunities.
The dialogue with customers confirmed that they are giving more of their transportation spend to CSX. Higher confidence for rail will lead to continued growth, which suggests CSX stock is undervalued at 16.4 times forward earnings.
The company is earning higher customer confidence by increasing the level of service and reliability. Low-value customers may ask for a discount to transportation rates but CSX need not compete by offering the lowest price. Its core customers, who are responsible for 66% of its business in merchandising, are willing to pay for higher prices. CSX has the flexibility in increasing prices to adjust for higher operating costs. In return, customers are assured they get the best possible service.
Potential Headwinds for CSX Stock
An economic slowdown will hurt volumes but the company is focused on what drives profitable growth. In effect, CSX stock is a recession-proof value play whose shares offer a solid dividend yielding 1.22%. On its conference call, management showed how driven it was in sustaining growth:
“If you look back over the last five years, our volumes with our short-line partners has declined CAGR, I think 3% over a year. That’s not acceptable. We got to turn that around, we got to grow that.”
The company is striving to gain a better understanding of its customer’s businesses. As it uses analytics and data to figure out how to help its customers succeed, its growth will increase in the longer term. CSX has a port development strategy and many other projects that build its customer relations. If it succeeds, it will re-gain the merchandise volume that it lost in the last few years.
Opportunity with Buying CSX Stock
CSX is a potential growth stock whose turnaround story will take at least a few quarters to a few years to unfold. Seasonally, the upcoming second-quarter report will show progress over the first quarter. And even though trucking rates are down, customers are not cutting back on shipments. The intermodal business should improve through channel partnerships.
Investors may safely assume CSX will grow revenue by at least 5% annually. If that scenario is modeled in a 5-year DCF Revenue exit, then the stock trades at close to fair value. Conversely, Wall Street is more bullish and has an $81 price target (per tipranks). At a recent price of $78.58, CSX stock still has an upside of 3.5%.
The CSX stock price is stuck in a $75-$80 range. This could change after the quarterly earnings report. Issuing a higher guidance may send shares to new yearly highs.
As of this writing, the author did not hold a position in any of the aforementioned securities.