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CSX has been treading water for the past six months, recording a small return of 1.1% while holding steady at $33.08. The stock also fell short of the S&P 500’s 10.4% gain during that period.
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We're cautious about CSX. Here are three reasons why we avoid CSX and a stock we'd rather own.
Why Do We Think CSX Will Underperform?
Established as part of the Chessie System and Seaboard Coast Line Industries merger, CSX (NASDAQ:CSX) is a transportation company specializing in freight rail services.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, CSX grew its sales at a sluggish 3.8% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
2. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Rail Transportation company because there’s a ceiling to what customers will pay.
Over the last two years, CSX failed to grow its units sold, which came in at 1.59 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests CSX might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, CSX’s margin dropped by 8.5 percentage points over the last five years. If its declines continue, it could signal higher capital intensity. CSX’s free cash flow margin for the trailing 12 months was 20.6%.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of CSX, we’ll be cheering from the sidelines. With its shares trailing the market in recent months, the stock trades at 15.7× forward price-to-earnings (or $33.08 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. Let us point you toward Meta, a top digital advertising platform riding the creator economy.