Is CSX Corporation Stock Overbought At $88?

by Trefis Team
CSX Corporation
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After a solid 83% rise since the March 23 levels of this year, at the current price of around $88 per share we believe CSX Corporation stock (NYSE: CSX), has reached its near-term potential. CSX stock has rallied from $48 to $88, outperforming the S&P which moved 63% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. The outperformance can be attributed to better than estimated Q3 results and the company being able to maintain its operating ratio of 57%, as we discuss in the sections below. CSX stock is also up 62% from levels of $55 seen in early 2018, over two years ago.

Some of the 62% rise of the last 2 years is justified by the roughly 4.6% growth seen in CSX’s revenues from 2017 to 2019. The company saw a 12% decline in total shares outstanding due to share repurchases, resulting in a 19% growth in revenue per share (RPS) to $14.98 in 2019, compared to $12.53 in 2017. With the growth in RPS, the company’s P/S (price-to-sales) ratio also expanded. We believe the stock is likely to see downside after the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 62% Change in CSX Corporation Stock between 2017 and now?, has the underlying numbers.

CSX Corporation’s P/S multiple changed from 4.4x in 2017 to 4.8x in 2019. Now that the company’s P/S has expanded to 5.9x, there is a potential downside risk when the current P/S is compared to levels seen in the past years, P/S of around 4.4x at the end of 2017 and 4.3x in 2018.

So what’s the likely trigger and timing for downside?

The global spread of Coronavirus has impacted the sales of CSX Corporation due to a decline in transportation demand earlier in the year amid lockdowns. That said, the company is now seeing a rebound in demand. The company’s management, in its latest quarterly earnings conference call, stated that the business has rebounded to pre-Covid levels in terms of volume. More importantly, the stock price growth of late is being driven by the company’s ability to control its costs during the current pandemic, and the Q3 operating ratio of 56.9% is just 10 basis points higher from the 56.8% figure seen in the prior year quarter. CSX has been aggressively focused on reducing its operating ratio over the recent years, and it managed to bring it down from 69% in 2016 to a little over 58% in 2019. This should bode well for its earnings growth going forward.

The company’s total revenue in the first three quarters of 2020 was down 8% y-o-y to $4.3 billion, while the earnings of $2.61 per share reflect a 18% decline over the $3.18 figure reported in the prior year period, primarily led by higher operating costs seen in the first half of the year, owing to the pandemic. Looking forward, with economies opening up gradually and the upcoming availability of vaccines, the demand for transportation is expected to rise. That said, much of these factors appear to be priced in the current stock value of $88, despite the expected recovery in demand post Covid. In reality, 2020 full year revenues are estimated to see a decline of 12% to $10.5 billion, while earnings are expected to be down 14% to $3.60.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of around $88, CSX stock is trading at 6.4x its 2020 expected RPS of $13.70, and 5.9x its 2021 expected RPS of $14.85. This compares with P/S of 4.4x seen in 2017, 4.3x seen in 2018, and 4.8x seen as recent as late 2019, making the stock appear vulnerable to downside risk.

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