Will CSX Stock Recover To Its Pre-Inflation Shock Level?

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CSX stock (NYSE: CSX) currently trades at $31 per share, around 18% below its level of $38 on March 30, 2022 (pre-inflation shock high), and it seems like it has little room for growth. CSX saw its stock trading at around $29 at the end of June 2022, just before the Fed started increasing rates, and is now up 7% above that level. In comparison, the S&P 500 gained about 11% during this period. The stock price gained after it reported upbeat Q1 results in late April, but it has corrected over the recent weeks with rising concerns over deteriorating economic growth. The broader markets have also been volatile with the developments around the U.S. debt ceiling bill, which goes to a final House vote this week. This has already impacted energy prices, with crude oil prices falling over the last week or so. 

Returning to the pre-inflation shock level means that CSX stock will have to gain more than 20% from here. However, we do not believe that will materialize any time soon, and we estimate CSX’s valuation to be around $33 per share, about 7% above the market price. This is because the recent uncertainty in the financial sector has made investors concerned about a potential recession. CSX’s business will see an adverse impact on its volume if the U.S. economy were to go into recession.  

Our detailed analysis of CSX’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

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2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
  • April 2021: Inflation rates cross 4% and increase rapidly
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
  • Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how CSX stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

CSX and S&P 500 Performance During 2007-08 Crisis

CSX stock rose from nearly $5 in September 2007 to $7 in August 2008 (pre-crisis peak) and fell sharply to $3 in March 2009 (as the markets bottomed out), implying CSX stock lost over 60% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $5 in early 2010, rising roughly 97% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

CSX’s Fundamentals Over Recent Years

CSX’s revenues rose from $11.9 billion in 2019 to $15.1 billion in the last twelve months period. This can be attributed to a strong recovery in demand post the pandemic-induced lockdowns. Furthermore, the company realized strong pricing gains, passing on the higher costs and higher fuel prices to the customers. For perspective, the company’s average revenue per carload grew 14% between 2019 and 2022, while its total carload volume was flat. CSX has also benefited from its acquisition of Quality Carriers – a trucking company focused on bulk liquid chemicals transportation – in 2021, bolstering revenue growth in the recent past. CSX’s EPS also increased from $1.39 to $1.95 per share over this period. The earnings growth was driven by higher revenues and an 11% decline in total shares outstanding as the company spent nearly $12 billion on share repurchases over the same period.

Does CSX Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

CSX’s total debt increased from $16.2 billion in 2019 to $17.9 billion now, while its total cash decreased from around $2.0 billion to $1.5 billion over the same period. The company also has long-term investments, which rose from $1.9 billion in 2019 to $2.3 billion now. It also garners about $6 billion in cash flows from operations. The company’s financial position is healthy, and appears to be in a good position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe CSX stock has the potential for good gains once fears of a potential recession are allayed. That said, fears of a potential recession and its impact on the railroad business means it may take a while for CSX stock to reach its pre-inflation shock highs of over $38.

What if you’re looking for a high-performance portfolio with a low downside instead? Here’s a reinforced value portfolio that has beaten the market consistently while limiting losses during periods of sharp market declines.

Returns May 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 CSX Return 1% 0% 159%
 S&P 500 Return 1% 10% 88%
 Trefis Multi-Strategy Portfolio 1% 10% 247%

[1] Month-to-date and year-to-date as of 5/31/2023
[2] Cumulative total returns since the end of 2016

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