CSX Corporation (NYSE: CSX) is scheduled to report its Q2 2022 results on Wednesday, July 20. We expect CSX to post revenue and earnings below the street expectations. While the company should benefit from strong consumer demand and a shift toward lower-cost transportation alternatives, the weakness in manufacturing output may weigh on its top-line growth. The manufacturing output fell 0.1% in May, after seeing a rise of 0.8% in April. 
Furthermore, rising costs due to higher inflation will likely result in a rise in the company’s operating ratio. That said, our forecast indicates that CSX stock is undervalued at its current levels, as discussed below. Our interactive dashboard analysis of CSX Earnings Preview has additional details.
(1) Revenues expected to be slightly below the consensus estimates
- Trefis estimates CSX’s Q2 2022 net revenues to be around $3.6 billion, reflecting a 19% y-o-y growth but slightly below the $3.7 billion consensus estimate.
- The company should benefit from strong demand for coal, given rising natural gas prices. Henry Hub natural gas price has increased to $6.3 per million British thermal units (MMBtu) currently, compared to $3.7 toward the end of 2021.
- U.S. coal production of 289 million short tons (MMst) in the first half of 2022 reflects a 2% rise from the prior-year period. 
- Higher inflation has resulted in some shippers turning to low-cost alternatives, such as railroads. With rising costs, the company should be able to expand its average revenue per carload, boding well for its top-line growth.
- However, automotive shipments may continue to face headwinds, given the semiconductor chip shortage issue.
- A lower manufacturing output in Q2 will likely weigh on the merchandise segment revenue growth. Our dashboard on CSX Revenues has more details on the company’s segments.
- CSX reported a 21% rise in revenue to $3.4 billion in Q1 2022, led by a solid 24% rise in average revenue per carload, partly offset by a 2% decline in the total volume of carloads.
(2) EPS likely to be marginally below the consensus estimates
- CSX’s Q2 2022 earnings per share (EPS) is expected to be $0.46 per Trefis analysis, just a cent below the consensus estimate of $0.47.
- CSX’s net income of $859 million in Q1 2022 reflected a 22% rise from its $706 million figure in the prior-year quarter, as a 24% sales growth was partly offset by a 150 bps rise in operating ratio to 62.4%.
- With rising costs, and a tough comparison with the prior-year quarter, which saw a 1990 bps y-o-y drop in operating ratio to 43.4%, we believe operating ratio will trend higher in Q2 2022.
- For the full-year 2022, we expect the adjusted EPS to be higher at $1.87 compared to EPS of $1.68 in 2021.
(3) CSX stock looks undervalued
- We estimate CSX’s Valuation to be around $42 per share, which reflects a significant 48% premium to the current market price of $28.
- This represents a forward P/EBITDA of 14x based on our forecast for CSX EBITDA. This compares with the last three-year average of 16x, making the stock attractive from a valuation point of view.
- Furthermore, if the company reports upbeat Q2 results and provides an outlook better than the street estimates, it is likely that the P/EBITDA multiple will be revised upward, resulting in higher levels for CSX stock.
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 23% 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||1%||-20%||71%|
|Trefis Multi-Strategy Portfolio||3%||-21%||211%|
 Month-to-date and year-to-date as of 7/13/2022
 Cumulative total returns since the end of 2016
- U.S. Industrial Production Eased in May, Adding to Signs of Economic Slowdown, Rina Torchinsky, June 17, 2022, The Wall Street Journal [↩]
- Short Term Energy Outlook, EIA [↩]