It’s been kind of choppy for the start of the earnings season. Take a look at CSX Corp. (NYSE:CSX) stock. When the company reported second quarter results, the reaction was swift — and harsh. The CSX stock price plunged by about 10%, the worst drop since the financial crisis in 2008.
As a result, other rail companies like Union Pacific Corporation (NYSE:UNP), Kansas City Southern (NYSE:KSU) and Norfolk Southern Corp. (NYSE:NSC) saw declines in their stock prices.
Now there are some things to keep in mind. First of all, CSX stock is still up about 16% for the year. If anything, the past week’s sell-off may have been partly an excuse to take some profits off the table.
Next, the quarterly results for CSX were not necessarily bad. The earnings came in at $1.08 per share, which was a miss of only 2 cents a share. As for the revenues, they were $3.06 billion whereas the Street was looking for $3.14 billion.
CSX also showed more progress in realizing efficiencies. In the quarter, the operating ratio was 57.4%, down from 58.6% during the same period a year ago. The goal is to maintain a level below 60%.
Yet the real problem was the guidance, which was far from inspiring. For the full-year, CSX is projecting a decline on the top-line of 1% to 2%. (Keep in mind that the prior forecast was for a 1% to 2% increase.) If that transpires, it would be the first annual decline since 2016.
Puzzling Backdrop
In the quarter, there was strength in categories like autos, agriculture products, minerals, fertilizers and chemicals. But the overall growth was not enough to compensate for the 10% drop in intermodal volumes. The net result: a 4% decline to 1.6 million units on a year-over-year basis. While CSX was able to raise prices, it was not enough to keep up the growth for revenues.
On the earnings call, CSX CEO James Foote had this to say about the situation: “Both global and U.S. economic conditions have been unusual this year, to say the least, and have impacted our volumes. You see it every week in our reported carloads. The present economic backdrop is one of the most puzzling I have experienced in my career.”
Granted, he is not saying there will be a recession. Yet it does look like Foote will take a cautious approach. Interestingly enough, it is this kind of psychology that can quickly spread and lead to economic downturns. And this would certainly weigh on CSX stock, as it is highly cyclical.
Bottom Line on CSX Stock
This week UNP also reported its quarterly results, which beat the Street. The stock rose about 6% on the news. Yet despite this, UNP is also seeing sluggishness on the top-line, as freight revenues were off by 2%. According to CEO Lance Fritz, in an interview with Yahoo Finance: “There [are] some unique impacts that are happening to the railroad that aren’t reflective of the U.S. or global economy.”
Yes, for the most part, the rail industry appears to be hitting a soft patch.
Now, as for CSX stock, the valuation is certainly more reasonable. Note that the forward price-to-earnings multiple is about 16x. And yes, there continue to be share buybacks, with $860 million in purchases for the quarter.
But then again, with the swirling uncertainty and revenue pressures, there are few catalysts right now and it would not be surprising if the stock languishes for awhile.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
