30% Downside For CSX Stock?

Despite a 17% decline in CSX Corporation’s (NASDAQ: CSX) stock since the beginning of the year, at the current price of around $60, CSX’s stock could see a significant downside, due to the impact of the coronavirus and oil price war crisis. CSX’s stock is still 17% higher than what it was since the start of 2018, a little over two years ago. Our dashboard, ‘CSX Downside: How Low Can CSX Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

A significant contributor to CSX’s stock price move over the last two years has been the expansion of its P/E multiple, which on a trailing basis, grew from about 9x at the end of 2017 to over 17x at the end of 2019. CSX’s P/E multiple plunged to 8.9x in 2017 from 19.0x in 2016, due to tax benefits of $2.3 billion, vs. tax expense of $1.0 billion in 2016, amid the changes to the U.S. tax laws. As such, GAAP EPS swelled in 2017, resulting in lower P/E multiple.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis will likely have a significant impact on CSX’s business, due to an overall decline in manufacturing, and lower consumer demand amid lockdown. Moreover, the oil price war led by Saudi Arabia has resulted in more than a 65% plunge in benchmark oil prices, with WTI down from $61 toward the beginning of the year to $20 levels currently (as of April 15). Lower oil prices will likely impact the U.S. oil production, thereby impacting transportation of oil and related products. Lower oil prices led to around a 20% decline in benchmark natural gas prices as well, which will directly impact the demand for coal, one of the key business segments of CSX. Given that several countries are on lockdown, the exports are also expected to take a hit as well. We believe CSX’s Q1 results next week will confirm the hit to its revenue. It is also likely to accompany a lower Q2 as-well-as full-year 2020 guidance.

Specifically, we believe the full-year revenue expectations formed by the market at the time of Q1 results may be closer to $10.1 billion, about 10% lower than its 2017 revenue of $11.4 billion, and 15% lower than the 2019 revenue of $11.9 billion. The market isn’t going to stomach this well, and CSX’s P/E multiple is likely to shrink by about 20% from 17.3x in 2019 to 14.0x in 2020.

CSX’s earnings margin can also shrink to about 24%, from the 28% seen in 2019, as lower volume and lower fuel prices will impact the overall pricing, which includes fuel surcharge revenue for CSX. This would mean a double whammy of 28% lower earnings and 20% lower P/E multiple, translating into CSX’s price drop of over 30%, to about $42 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed during late Q2 or early Q3, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies, including Union Pacific and Adobe. The complete set of coronavirus impact and timing analyses is available here. Overall, we believe CSX’s stock price at levels of $40 and below provide a buying opportunity for investors willing to be patient.

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