CSX Corporation (NYSE: CSX) is scheduled to report its Q3 2020 results on Wednesday, October 20. We expect CSX to post revenue and earnings slightly below the consensus estimates. That said, the revenue will trend higher driven by an expected increase in coal transportation as well as a rebound in merchandise freight, in our view. However, the margins in Q3 may face some pressure due to inflationary headwinds and rising labor costs. Not only do we believe CSX will post Q3 results slightly below the street expectation, we find CSX stock to be appropriately valued at the current levels of $34, with limited room for growth. Our interactive dashboard analysis on CSX Corporation’s Pre-Earnings has additional details.
(1) Revenues expected to be below the consensus estimates
Trefis estimates CSX’s Q3 2021 revenues to be a little under $3.0 billion, slightly below the $3.1 billion consensus estimate. More than a 2x rise in natural gas prices over the last year or so has resulted in an increased demand for coal, and the U.S. coal production is estimated to grow 10% y-o-y to 588 million short tons for the full year 2021.  This will aid the coal transportation demand for railroad companies, including CSX. The trucking industry still faces driver shortages, and railroad companies likely benefited from this with some of the trucking business shifting to intermodal. The company’s merchandise freight is also expected to see growth with a recovery in economic activity compared to Q3 of last year. Looking back at Q2 2021, revenues surged 33% to $3.0 billion, with strong growth across its three segments – Merchandise, Intermodal, and Coal. Our dashboard on CSX Corporation’s Revenues offers more details on the company’s segments.
2) EPS also likely to be below the consensus estimates
CSX’s Q3 2021 earnings per share (EPS) is expected to be $0.36 per Trefis analysis, just two cents below the consensus estimate of $0.38. CSX’s net income of $1.2 billion in Q2 2021 reflected a solid 2.4x surge from its $0.5 billion figure in the prior-year quarter. This can be attributed to higher revenues and nearly 2,000 bps drop in operating ratio to 43.4%. Looking forward, inflationary pressure and rising wages likely impacted the company’s margins in Q3, weighing on overall earnings growth. That said, for the full-year 2021, we expect the EPS to be higher at $1.50, compared to $1.20 in 2020.
(3) Stock price estimate just 5% above than the current market price
Going by our CSX’s Valuation, with an EPS estimate of around $1.50 and a P/E multiple of around 24x in 2021, this translates into a price of $36, which is only 5% above the current market price of around $34, implying that CSX stock is appropriately valued at its current levels.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Earnings for the full year
While CSX stock appears to be appropriately priced, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Canadian Pacific Railway vs. D R Horton.
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