Transportation

Why CSX Stock Looks Good Even If the Market Goes South

While the coronavirus pandemic has sidelined many businesses, it has created ample opportunity for others to fill meaningful roles in these troubling times. After seeing a sizable drop, shares of CSX Corp. (NYSE: CSX) may be positioned to reap some of the benefits of this pandemic down the line.

Obviously, COVID-19 has put a real strain on supply lines across the globe. If anything, this has only emphasized the need for dependable transportation. What better than the railroads that built this country to come through now? Again, it’s no secret that rail traffic has declined since the onset of this pandemic, but that’s not to say it will not pick up after this crisis and even in the long term.

The Dow Jones industrial average, S&P 500 and Nasdaq have each picked back up from the trough in mid-March. As the stock market has risen, CSX has seen a solid bounce off this low as well. CSX stock bottomed around $47, but it recovered to $64, adding about 36% from the lows. As far as stock prices go, 36% in less than one month is a solid leg in the recovery, but there is still a ways to go.

What Does CSX Do That’s So Important?

CSX is a transportation company that provides rail-based freight transportation services, as well as transportation for intermodal containers and trailers. As of the close of 2019, it had a network of 30 terminals transporting manufactured consumer goods in containers.

For non-rail served customers that don’t have access to these terminals, the firm is capable of transferring products from rail to truck. Further, the company serves the automotive industry with distribution centers and storage locations.

Additionally, it acquires, develops, sells, leases and manages real estate properties. The company operates approximately a 20,500 route mile rail network, which serves various population centers in 23 states east of the Mississippi River and up into Canada.

Shipping has become increasingly important, with more consumers purchasing goods online as opposed to in stores. As much as Amazon or FedEx move more consumer products across the country, CSX deals more with industrial players. There is also some crossover into the consumer goods segment.

Corona Complications

The Association of American Railroads (AAR) recently reported U.S. rail traffic for the week ending April 4. Total U.S. weekly rail traffic was 429,095 carloads and intermodal units, down 15.9% compared with the same week last year.

Total carloads for the week came to 210,911, down 16.2% compared with the same week in 2019, while U.S. weekly intermodal volume was 218,184 containers and trailers, down 15.7%.

John T. Gray, AAR senior vice president, commented:

The impact of the novel coronavirus on railroads is growing. Since 1988, when our data begin, total U.S. rail carloads were lower than they were last week only during a few Christmas and New Year’s weeks, when rail operations are seasonally low.  Part of the problem now is sustained weakness in coal carloads, but even excluding coal, carloads last week were down 13.1%. We haven’t seen sustained declines of that magnitude since the Great Recession. The worst performing commodity category last week was autos and auto parts, with North American carloads down 84% from what they were just three weeks ago. It wasn’t just autos, though: last week, 13 of the 20 U.S. carload categories we track, representing 87% of total carloads, saw year-over-year declines, including big declines in steel scrap, steel products, nonferrous scrap, crushed stone and sand, and petroleum products. Based on rail data, it’s clear that many sectors of U.S. industry are beginning to feel the impact of coronavirus disruptions.

Looking at a longer time frame, in the first 14 weeks of 2020, U.S. railroads reported cumulative volume of 3,203,962 carloads, down 7.1% from the same period of last year, and 3,396,469 intermodal units, down 9.1% year over year. Total combined U.S. traffic for the first 14 weeks of 2020 was 6,600,431 carloads and intermodal units, a decrease of 8.1% from last year.

Fundamentals

CSX last reported results back in January, so it is due up again in mid-April. The first quarter, ended in March, is highly likely to see weak results comparatively. However, analysts still have something to say about the fundamentals.

In the most recent quarter, the company said that it had earnings per share of $0.99, on revenue of $2.89 billion. Note that revenues shrank 8% year over year. In terms of the full-year numbers, revenue was down 3% and per-share earnings were up 9%.

Rising profits on falling revenues typically means cost reductions. CSX posted its lowest full-year operating ratio ever in 2019, 54.8%, which was significantly better than its 2018 ratio of 60.3%.

Note that a railroad’s operating ratio is nothing more than total expenses divided by revenue. In this case, a lower score is better. After a questionable 2019, CSX had some good news to tell investors.

Looking ahead to the first quarter, Wall Street is calling for $0.94 in EPS and $2.86 billion in revenue. These numbers are lower than last year’s, which came in at $1.02 per share and $3.01 billion. Basically, analysts’ estimates indicate a 5% revenue decline year over year.

On the other hand, many investors are taking the perspective that this earnings season holds very little bearing on the market. Considering headwinds from the coronavirus crisis that has effectively shut down most of the economy, it’s a safe bet that practically all companies will underperform this quarter, and even into the second quarter.