CSX stock (NYSE: CSX), which currently trades at $31 per share, looks like a good investment opportunity. The stock is down 16% year-to-date, performing in line with the broader S&P 500, which remains down by about 15% over the same period.
There are a couple of trends driving the stock lower of late. The demand for railroad business can primarily be linked to economic growth. The current high inflationary environment, rising interest rates, and recession fears have weighed on railroad stocks. Some prominent Wall Street analysts have recently downgraded their rating on CSX, citing the concerns over economic growth.
Looking at some of the individual segments, automotive volume is still lower than pre-pandemic levels, given the semiconductor chip shortage. Although coal has a positive momentum on its side with rising production in the U.S. and increased global demand due to higher natural gas prices, its volume is still below the pre-pandemic levels. On the positive side, CSX has managed to grow its average revenue per carload for all the segments, and that has been the key revenue growth driver for the company. The company managed to bring its operating ratio down to 55.3% in 2021, compared to 58.8% in 2020 and 58.4% in 2019. However, as of Q1 2022, the figure increased 150 bps y-o-y to 62.4%.
Now, the concerns around economic growth are genuine, and railroad companies may likely see some pain on the demand side over the next few quarters. However, we remain bullish on CSX stock, especially given the recent correction. At current levels of around $31 per share, CSX stock trades at under 17x projected 2022 earnings of $1.87 on a per-share basis, which compares with an average of over 19x in the last three years. Given its ability to garner higher revenue per carload, we don’t expect a significant impact on the company’s operating ratio in the near term. We value CSX stock at about $42 per share, which is roughly 36% ahead of the current market price. See our analysis on CSX Valuation: Expensive or Cheap for more details on what’s driving our valuation for the company. Also see our analysis on CSX Revenue: How Does CSX Make Money, for more details on the company’s key revenue streams and how they have been trending.
Furthermore, the Covid-19 crisis 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 CSX vs. Simpson Manufacturing.
|S&P 500 Return||-4%||-17%||78%|
|Trefis Multi-Strategy Portfolio||-5%||-21%||209%|
 Month-to-date and year-to-date as of 5/26/2022
 Cumulative total returns since the end of 2016