CSX Corporation (CSX): 3 Problems That Aren’t Going Away

The second domino to fall is the fact that the company’s free cash flow payout ratio has risen to dangerous levels. Most investors like to see a free cash flow payout ratio of no more than 70%. In the current quarter, CSX’s payout ratio was 92.23%. By comparison, Norfolk Southern’s ratio was 75.73%, and Union Pacific reported a ratio of just 47.30%.

When a company has lower operating cash flow, and a high payout ratio, something has to give. In CSX’s case, what has occurred is their balance sheet is weaker than their competition. The company’s debt-to-equity ratio is now 1.01. Looking at Norfolk Southern at 0.86 and Union Pacific at 0.44, CSX is again operating at a disadvantage.

Conclusion
In the industry, there is really no question that Union Pacific is the leader. The company outperforms its competition in nearly every area. Investors who have been hanging onto CSX shares should seriously consider switching tracks. Though analysts are calling for over 12% EPS growth from CSX in the next few years, I’m beginning to wonder if this will occur. The continued softness in the coal industry doesn’t appear to going away. I might have suggested that CSX and Norfolk Southern were interchangeable in the past, but based on the current quarter that thesis is breaking down. Norfolk Southern has a higher yield, is less reliant on coal, and reported a much smaller decline in operating cash flow. Unless CSX can improve its cash flow and decrease its reliance on coal, the company will continue to be the caboose in this three train race.

The article 3 Problems That Aren’t Going Away originally appeared on Fool.com and is written by Chad Henage.

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