CSX Stock Back To $80 Post-Covid?

CSX stock (NYSE:CSX) has rallied 59% since late March (vs. about 53% for the S&P 500) to its current level around $75 after falling to a low of $47 in late March as a rapid increase in the number Covid-19 cases outside China resulted in heightened fears of an imminent global economic downturn. The stock remains 5% below the $79 peak it reached in mid-February. Are the gains warranted? We largely think that they are, and believe the stock is likely to recover to pre-crisis levels in the coming quarters, as fears surrounding the pandemic are put to rest and the economic recovery gathers pace. Our conclusion is based on our detailed comparison of CSX’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

How Did CSX Stock Fare During The 2008 Downturn?

We see CSX stock declined from levels of around $11 in October 2007 (the pre-crisis peak) to roughly $7 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 42% of its value from its approximate pre-crisis peak. This marked a lower drop than the broader S&P, which fell by about 51%.

However, CSX recovered strongly post the 2008 crisis to about $13 in early 2010 – rising by 100% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

In comparison, CSX stock lost 34% of its value between the market peak on February 19 to the low on March 23, and has already recovered back 59% since then. The S&P in comparison fell by about 34% and rebounded by about 54%.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely put investor concerns about the near-term survival of companies to rest. The flattening of Covid cases in badly hit U.S. and European cities is also giving investor’s confidence that developed countries have put the worst of the pandemic behind them. 

CSX’s business, in particular, has been impacted given that many industrial units are working at a limited capacity, and automotive specifically, has been the worst hit segment for transportation companies. Coal freight volume was already on a decline even pre-Covid due to lower natural gas prices impacting the demand for coal, which fell further during the pandemic with even lower demand for coal, and this will likely be the trend going forward as well.

Thus far in 2020, CSX has seen a 16% decline in revenues, primarily led by a 42% decline in automotive freight and 37% drop in coal freight, while most of the other segments fared reasonably well with low single-digit decline in freight revenues, given that a decline in sales for many companies is imminent in 2020 given the pandemic. CSX’s earnings fell 21% to $1.65 per share for the six months period ending June, compared to $2.10 in the prior year period. The earnings decline was steeper than revenues, due to a contraction in margins, given the volume was lower and fixed costs remaining the same. Looking forward, with the gradual easing of lockdowns and plants working at increased capacity, volume for CSX will likely increase aiding both the freight revenues and margins in the near term. 

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. While Q3 results are expected to be better than Q2, investors will focus their attention on 2021 results – helping CSX stock get back to the pre-crisis levels, roughly 6% above the current market price. Our detailed analysis on CSX Valuation of $81 per share is also largely around the pre-crisis levels. 

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