Why CSX Stock Is Up 2x While Revenues Grew A Mere 7%?

CSX Corporation’s stock (NYSE:CSX) is up over 2x since the end 2016. But how did the company pull off such impressive gains, as its revenues grew a mere 7% over the same period? Well, there is a valid reason, of course. As it turns out, the net earnings margins (profits as a percent of revenues), expanded a stellar 1250 bps from 15.5% to 27.9% between 2016 and 2019, driven by the company’s focus to reduce its operating ratio. Our dashboard on CSX Corporation Revenues And Stock Price Change Mismatch provides the key numbers behind our thinking, and we explain more below.

What Brought About A Change In Margins & Multiple?

The expansion in CSX’s net margins was brought about by lower cost of revenues, as well as better operating cost management. The company’s biggest expense item, Labor & Fringe, has declined over the recent years, both in absolute dollar value, as well as a percentage of revenues. The margins going from 15.5% to 27.9% coupled with a 7% increase in revenues from $11.1 billion to $11.9 billion has meant that the earnings per share grew a stellar 130% from about $1.81 per share in 2016 to $4.18 a share in 2019.

While the margins expansion was the key to stock price growth, it was partly offset by a slight decline in the company’s P/E Multiple, which dropped from 19.0x to 17.3x over the same period. There are two broad factors currently impacting the multiple. Firstly, the gradual decline in the company’s coal shipments in the wake of lower natural gas prices. In fact, the coal shipments have roughly halved over the last decade from 1.6 million carloads in 2010 to 0.8 million in 2019. Secondly, the potential impact of the Covid-19 pandemic on the U.S. economy, and in turn, on CSX’s operations.

Despite the large stock price move, CSX still appears to be attractive compared to some of its peers, including Union Pacific, which is currently trading at 20.4x its 2019 EPS of $8.41. Having said that, there are near term risks associated with CSX’s stock, as we discuss in our dashboard analysis on an outlier downside case of a 15% drop in revenue and net income margin in 2020, resulting in 40% decline for CSX’s stock from the current levels.

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