After a 22% fall year-to-date, at the current levels, we believe CSX stock (NYSE: CSX) looks undervalued. CSX stock fell from around $37 in early January to under $29 now. The YTD 22% fall for CSX compares with the -19% returns for the broader S&P500 index.
Looking at the longer term, CSX stock is up 40% from levels seen in late 2018. This marks an underperformance compared to some of its peers and the broader markets, with Union Pacific stock and Norfolk Southern stock up 53% and the S&P500 index rising 57% over this period.
This 40% rise for CSX stock since late 2018 was driven by: 1. CSX revenue, which grew 7% to $13 billion over the last twelve months, compared to $12 billion in 2018, 2. the company’s P/S ratio, which rose 33% to 4.9x trailing revenues, from 3.7x in 2018, and 3. a 14% fall in its total shares outstanding to 2.2 billion. This means the company’s revenue per share rose 25% to $5.96 now, compared to $4.76 in 2018. Our interactive dashboard, Why CSX Stock Moved, has more details.
CSX’s revenue growth between 2018 and 2021 can be attributed to a nearly 2x rise in its Trucking & Other segment sales to $1.2 billion in 2021. The company has seen a 3.5% decline in the volume of carloads, which more than offset a 1% rise in average revenue per carload over this period, resulting in a 2.6% fall in total revenue for its Coal, Merchandise, and Intermodal segments.
What has gone well for the company is its operating ratio, which fell to 55.3% in 2021, compared to 60.3% in 2018. The operating margin expansion has resulted in a solid 31% earnings growth, despite a lackluster top-line growth of just 2% over this period. CSX has spent a significant $11.8 billion on share repurchases between 2018 and 2021, resulting in a 13% fall in total shares.
Looking forward, automotive shipments (part of the Merchandise segment) will likely continue to face headwinds, given the semiconductor chip shortage. 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, and this trend is expected to continue in the near term. With increasing costs, CSX will likely see a continued rise in its average revenue per carload for all the segments, which should bolster the overall revenue growth driver for the company.
However, there are near-term headwinds for the company. 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. In the past few months, some prominent Wall Street analysts have downgraded their rating on CSX, citing concerns over economic growth.
Still, we find CSX stock undervalued currently and estimate CSX’s valuation to be $42 per share, reflecting a significant 45% upside from its current market price of $29, implying that investors are likely to be better off buying CSX stock in the recent dip for solid gains in the long-term. At its current levels, CSX stock is trading at 4.6x forward revenues, compared to the last three-year average of 5.6x, making the stock attractive from a valuation point of view.
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. Amerco.
With inflation rising and the Fed raising interest rates, among other factors, CSX stock has fallen 22% this year. Can it drop more? See how low CSX stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||3%||-18%||74%|
|Trefis Multi-Strategy Portfolio||6%||-18%||221%|
 Month-to-date and year-to-date as of 7/11/2022
 Cumulative total returns since the end of 2016