With the pronounced destruction caused by the novel coronavirus, it wasn’t surprising to see railroad transportation specialist CSX (NASDAQ:CSX) suffer significantly during the first three months of the year. For investors, CSX stock is where the rubber meets the road. If any economic indicator of recovery is to be believed, theoretically, you should see it play out in the share price.
Therefore, I find incredible value in CSX stock as an economic barometer. But would I buy it as a possible bounce-back opportunity? Here, I’m skeptical. Given that the company transports goods of various industries, CSX will necessarily feel pain. How much pain, though, is the question.
That’s not to say that there isn’t any good news. Not too long ago, the transportation firm released its earnings results for the first quarter. Earnings per share came in at $1, beating the consensus estimate for 94 cents. Additionally, the railroad’s operating ratio improved to a ratio of 58.7 from 59.5 in the year-ago quarter. Since the operating ratio reflects operating expenses as a percentage of revenues, a lower ratio indicates higher efficiency.
Interestingly, CSX president and CEO Jim Foote noted that the company is using the downtime caused by the pandemic to conduct maintenance and perform prep work for an eventual return of volume.
In principle, that sounds very encouraging. However, it’s also possible that CSX stock found a temporary respite. As key economic data rolls in and as we undergo an unprecedented recovery effort, shares may face extreme volatility. Here are three reasons to avoid gambling on the railroad for now.
CSX Stock Faces Geographic Exposure
If you look at CSX’s system map, or its rail service “coverage,” if you will, you’ll notice that the company is mostly concentrated in the east coast. In any other circumstance, I wouldn’t think anything of it. These are the states that form vital cogs in our collective economic machinery.
Of course, the exception is if a pandemic disproportionately impacts the region. At that point, yes, I would have serious concerns; hence, my hesitation toward CSX stock.
Comparing coronavirus cases geographically, you might as well split the country into two halves. On the west coast, you currently have a total of nearly 78,000 cases, which is nothing compared to the east. Even if you include Arizona, Utah, Nevada, and Idaho into the mix, you have just over 100,000 cases.
New York alone has over 330,000 cases. Additionally, neighboring states, such as New Jersey and Massachusetts have large case figures. Naturally, you would expect these highly impacted regions to return to normal slower than other states. In turn, this may negatively affect CSX stock.
Also, don’t forget that infectious disease experts are concerned about a second wave of the coronavirus. If that happens, the underlying mechanisms that caused the eastern part of the U.S. to suffer disproportionately may again hurt extremely relative to other states.
That would have a cascading effect on CSX. Frankly, that risk is not worth whatever reward buying shares now would bring.
Railroads Face Volume Declines
Obviously, railroads need the underlying economy to perform well. If businesses and industries shut their doors, nothing gets transported. And if nothing gets transported, CSX as a company is out of a job. Unfortunately, this extreme scenario is steadily materializing.
In 2018, 61% of CSX’s revenue came from a mix of merchandise. Well, that’s a bit of a problem because almost all retail categories – save for the essentials like food, water, and toilet paper – have declined precipitously. As a reference, consider the sales breakdown of big-box retailer Target (NYSE:TGT). While they enjoyed a huge increase in their grocery and home essentials departments, their sales of discretionary items like apparel cratered.
Since that’s the railroad industry’s bread and butter, taking that out of the equation will have severe consequences.
But other cargo segments are also at risk. For instance, 18% of 2018 revenue came from transporting coal and coal products. Sadly, as NPR noted, the coal industry is one of the hardest hit right now. Even before this crisis, coal was struggling. With the crisis, coal finds itself more expensive than gas, wind or solar, resulting in stockpiles not unlike what we see in the crude oil industry.
It all points to a grim outlook for CSX stock.
Economic Pain Will Probably Persist
With each day that passes, the likelihood of a quick V-shaped economic recovery declines substantially. If there was any lingering hope, the latest weekly jobless claims report may dispel any hint of optimism.
In the week ending May 2, approximately three million workers filed for unemployment benefits for the first time. Over the past seven weeks, the total figure has jumped to an unbelievable 33 million.
Minneapolis Federal Reserve President Neel Kashkari gave a sobering assessment of the situation, stating that the upcoming jobs report will probably indicate unemployment at 16% or 17%. However, he thinks the “real number” is around 23% to 24%.
I think it’s fair to point out that many, if not most, economic experts have recently pointed the needle toward the pessimistic end of the spectrum. Rarely are you finding voices now that suggest that the coronavirus is a temporary setback, a blip on the radar.
Unfortunately, the broader transportation industry needs a somewhat stable economy to thrive. Today, CSX finds itself in survival mode. I just don’t have the stomach to find out what mode it will be in tomorrow, if it’s in any mode at all.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.