CSX (NYSE: CSX) reported its Q3 results last week, with revenues falling below and earnings meeting the street estimates. However, we believe that CSX stock has ample room for growth, as discussed below. The company reported revenue of $3.6 billion, reflecting an 8% fall from the prior year period and slightly below the $3.7 billion street estimate. Its earnings of $0.42 per share were down 19% y-o-y and aligned with the consensus estimate. In this note, we discuss CSX’s stock performance, key takeaways from its recent results, and valuation.
CSX stock has seen little change, moving slightly from levels of $30 in early January 2021 to around $30 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. Overall, the performance of CSX stock with respect to the index has been lackluster. Returns for the stock were 24% in 2021, -18% in 2022, and -4% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 11% in 2023 (YTD) – indicating that CSX underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including UPS, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CSX face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, CSX stock looks like it has ample room for growth. We estimate CSX’s Valuation to be $35 per share, reflecting a 20% upside from its current levels near $30. Our forecast is based on a 19x P/E multiple for CSX and expected earnings of $1.83 per share for the full year 2023, compared to the last four-year average P/E multiple of 18x.
CSX’s revenue of $3.6 billion in Q3 was down 8% y-o-y, partly due to lower fuel surcharges and intermodal demand. Overall volume was down 2%, while the average revenue per unit fell 6% during the quarter. All segments saw a y-o-y decline in revenues, with intermodal leading the fall, down 14%. The company saw its operating ratio deteriorate by 430 bps y-o-y to 63.8%. Higher revenues and margin contraction led to a 19% y-o-y rise in the bottom line to $0.42 per share in Q3’23.
CSX stock is trading at 4.1x sales compared to the last five-year average of 5.0x, implying ample room for growth. We believe investors will likely be better off buying CSX for robust gains in the long run. However, fears of a potential recession and its impact on the railroad business remain a key risk factor for CSX’s near-term growth.
While CSX stock looks like it can see higher levels, it is helpful to see how CSX’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||-1%||11%||90%|
|Trefis Reinforced Value Portfolio||-3%||20%||516%|
 Month-to-date and year-to-date as of 10/25/2023
 Cumulative total returns since the end of 2016