CSX (NYSE:CSX) reported weak earnings in mid-July. Since then, the CSX stock price has lost more than 17% of its value. Contrarians thinking of buying on the dip might want to protect their downside by opting for Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B).
Here’s why.
The Latest Quarter
CSX reported its second quarter of 2019 earnings on July 16.
On the top line, CSX had revenues of $3.06 billion, 1% less than a year earlier. This figure was also 2.6% lower than the consensus estimate for the quarter. On the bottom line, CSX increased earnings by 7% in the quarter to $1.08 a share. However, it missed the analyst estimate by 2.7%.
Although earnings weren’t horrible, it was the cut in guidance for the year that sent investors scurrying for the exits. Initially, CSX expected revenue in 2019 to grow 1% to 2%; it now expects revenues to fall by a similar magnitude.
CSX’s slowdown isn’t unique. Most of its peers reported sluggish volume in the second quarter while also missing analyst expectations. It’s clear that the U.S.-China trade war is starting to impact the railroad industry.
How’s it looking over at Burlington Northern Santa Fe, Berkshire Hathaway’s railroad subsidiary?
Not much better.
In the second quarter, BNSF saw revenues increase marginally from $5.88 billion to $5.89 billion with a 2.2% increase in net income. So, it produced similar results. And it’s fair to say it too will deliver weaker results in the next two quarters of fiscal 2019.
However, with the economy looking like it’s about to go into a slow-down mode, Berkshire makes far more sense as a railroad play thanks in large part to the consistent revenue and earnings generation of its insurance business.
The Downside Protection of BRK
In the first six months of 2019, Berkshire’s insurance unit generated $17.5 billion, 8% higher than a year earlier. On the bottom line, its pre-tax income was $4.08 billion in the first six months. This was 5.6% lower than the previous year, due to higher underwriting losses and loss adjustment expenses.
The profitability of the underwriting segment of its insurance business is dictated by the number and severity of claims in a given quarter or period. Sometimes it’s going to go in the company’s favor; sometimes it won’t.
However, in the end, Berkshire Hathaway’s insurance business is going to generate billions in profits, a luxury that CSX doesn’t have.
So, if you believe that things are going to get much dicier heading into 2020, CSX stock is far more vulnerable to a market correction than Berkshire.
The Bottom Line on CSX Stock
My InvestorPlace colleague Luke Lango recently discussed three reasons why now isn’t the time to buy despite the fact the CSX stock price has corrected substantially since announcing its earnings.
Paraphrasing Luke’s comments, railroad fundamentals are weak and aren’t expected to improve anytime soon. Secondly, there’s nothing particularly noteworthy that stands out about CSX at the moment. Finally, investors have little interest in taking on any more trade exposure than is humanly possible.
Lango believes that the slide in CSX stock over the past month could continue given the lack of interest in railroad stocks. I would have to agree.
If you have idle cash and are thinking about putting a little of it into a beaten-down CSX stock, I’d opt to either keep it in cash or do the lesser of two evils and buy Berkshire stock.
This way, you get railroad exposure while maintaining a good level of diversification.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
