CSX is down -12% in 2022. Has it reached useful value yet?

Figuratively speaking, starting a new year generally means not only turning the page, but also closing the book on the year before. From a practical standpoint, as investors that can be a little bit difficult, because the questions that have to be answered about the past year include not only profit and loss, but also tax ramifications and what you learned from the last twelve months of experience and what you will be doing with that learning as you move forward.

COVID-19 and the global pandemic, in my opinion have made closing the book on the last year even harder than normal. 2021 started with the good news about new vaccine approvals and availability, raising the hope that the worst effects of the crisis would be over. Starting 2022, however as the rise of the new COVID variants has kept pressures from the ongoing health crisis at the forefront of national commentary as well as economic concerns. Even so, the economy has shown a significant amount of strength. While things in many of the most obvious ways still haven’t recovered to pre-pandemic levels, the increasing pace of economic activity has been enough to prompt economists and analysts to start worrying about inflation, including the sustainability of economic progress so far and the much-feared spectre of rising interest rates. For investors, that means that for most of the past year, stocks whose businesses thrive when the economy is growing have been in vogue. Those that tend to be a bit more defensive in nature have been noticeably less in favor. That’s reflective of something that economists like to call cyclicality, which just means that as economies ebb and flow through cycles of prosperity to scarcity and back again, so does the stock market.

Cyclical stocks are those that are expected to do well when economic conditions are generally healthy, and that will naturally struggle when the economy struggles. One of the core sectors of the economy that fits this very generalized description is the Transportation sector, which takes in a broad set of industries, including airlines, railroads, trucking and freight, overseas shipping, and so on. The start of 2022 has increased uncertainty, not only because of continued COVID pressures but also as investors and analysts come to grips with an economic climate that continues to show significant strength along with the high probability that the first of expected, incremental interest rate hikes will come in March of this year.

Uncertainty and volatility amid signs that the economy is struggling means that you can often find stocks in these industries trading at pretty significant discounts to their not-so-distant highs. That makes them tempting fodder for a contrarian, value-oriented investor. I like to pay attention to these stocks, because their fundamentals can give me some useful clues about their ability to weather an economic downturn. These are also stocks that, like any other, can see big swings from high to low based on nothing more than the market’s expectation for what the economy might do in the near future.

CSX Corporation (CSX) is a good example of the kind of stock I’m referring to. As one of the four largest transportation companies in the oligopoly that is the Road & Rail industry, this is a stock that is very sensitive to a variety of economic dynamics, from commodity and fuel prices to interest rate fluctuations. The collapse of oil prices during the pandemic might have been taken as a good thing for this sector, since fuel costs should generally be lower; but as economy activity ground to a halt during the second quarter of 2020, so too did the demand for transportation services. 

From a bear market bottom in March of 2020, the stock rebounded like most of the rest of the market as investors acted on the hope that the net economic effect would be temporary; in fact, the stock used the market’s broad, forward-looking and bullish hope of a recovery as a reason to push the stock from around $22 in July 2020 to a peak in early May of 2021 at around $35. From that point, the stock dropped back to a short-term low at around $30 in late September. Since then, the stock picked up a lot of bullish momentum, peaking at the start of January at around $38, but has fallen back by a little over -12% as broad market uncertainty has increased.

Cyclical stocks like CSX are sensitive to the kind of pressures and dynamics I’ve just outlined, which is why it becomes important to take a critical look at the company’s balance sheet and overall fundamental strength. This is a company with a strong fundamental profile, and a balance sheet that has weathered the pandemic storm remarkably well. That is a positive sign that bodes well for the company in the long-term, but another question we have to answer is whether the stock’s current trading price represents a compelling enough value under current market conditions to justify taking its long-term opportunity seriously. Let’s dive in.

Fundamental and Value Profile

CSX Corporation is a transportation company. The Company provides rail-based freight transportation services, including traditional rail service and transport of intermodal containers and trailers, as well as other transportation services, such as rail-to-truck transfers and bulk commodity operations. The Company categorizes its products into three primary lines of business: merchandise, intermodal and coal. The Company’s intermodal business links customers to railroads through trucks and terminals. The Company’s merchandise business consists of shipments in markets, such as agricultural and food products, fertilizers, chemicals, automotive, metals and equipment, minerals and forest products. The Company’s coal business transports domestic coal, coke and iron ore to electricity-generating power plants, steel manufacturers and industrial plants, as well as export coal to deep-water port facilities. CSX has a current market cap of $74.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased a little more than 21%, while sales increased 21.3%. In the last quarter, earnings declined by -2.33% while sales were about 4% higher. CSX operates with a healthy, robust margin profile that has been remarkably resilient, but also matches its current declining earnings pattern; in the last twelve months, Net Income was a little more than 30% of Revenues, but weakened to 27.25% in the last quarter.

Free Cash Flow: CSX’ Free Cash Flow is healthy and growing, at more $3.8 billion. That marks an improvement from about $3.6 billion in the quarter prior, and about $2.8 billion a year ago. Their current Free Cash Flow number translates to a Free Cash Flow Yield of 5.15%.

Debt to Equity: CSX has a debt/equity ratio of 1.2. This indicates the company is highly leveraged; but this is also very typical of stocks in the Transportation industry. Their balance sheet shows they have about $2.3 billion in cash and liquid assets against roughly $16.2 billion in long-term debt as of the most recent quarter. The company’s operating profile suggests there should be no problem servicing the debt they carry.

Dividend: CSX pays an annual dividend of $.37 per share, which at its current price translates to a dividend yield of about 1.11%. Their dividend payout ratio is also conservative, at less than 25% of their earnings over the last year.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $32.50 per share. That means the stock is somewhat overvalued at its current price, with -3% upside from its current price, and with a useful bargain price at around $26.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above displays the past year of price activity for CSX. The red diagonal line traces the stock’s upward trend from its February 2021 low at around $28.50 to its peak at the start of January at around $38. It also provides the baseline for the Fibonacci retracement levels outlined on the right side of the chart. The stock has corrected sharply off of that high, and is now sitting around the 50% retracement line in the $33.50 price area, and marking where current support could give the stock a level at which to begin stabilizing. Immediate resistance is around $34.50, based on the 38.2% retracement line as well as pivot activity around that level at the beginning of December, mid-August, and the spring months of 2021. A drop below $33.50 should find next support around the 61.8% retracement line, in the $32 price area, while a push above $34.50 looks to have short-term upside to around $36.50 based on pivot highs in that range in November and December of last year.

Near-term Keys: From a long-term perspective, it’s hard to see a lot of long-term upside in CSX, despite its strong fundamental profile. While Free Cash Flow is increasing, I also consider the company’s decline in earnings and Net Income as a red flag that bears watching. Based on the fair value analysis I described earlier, the stock wouldn’t offer a compelling value-based price unless it drops to around $26 per share – which is about -22% below the stock’s current price. That means the best opportunities to work with the stock are with short-term, momentum-oriented trades. A push above $34.50 could offer a signal to consider buying the stock or working with call options, with a useful target price at around $36.50. Even with the stock’s current bearish momentum, there appears to be very limited foreseeable downside below current support, which also means that looking for a bearish trade right now is a very low-probability prospect. If you are willing to work with narrow price ranges and very quick turnarounds, you could use a drop below $33.50 as a signal to consider shorting the stock or buying put options, with a practical exit target at around $32 per share on a bearish trade.


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