Many investors pay a lot of money for magazine subscriptions, newsletters, and other research to try and determine the direction of the economy. In truth, most of these could probably be replaced by the ownership of just one railroad stock. I’ve argued in the past that railroad earnings reports are like a multi-industry cheat sheet. One example is CSX Corporation (NYSE:CSX), which gives investors great information about the economy as a whole. The even better news is, CSX is getting itself on track for gains in the future.
The economic cheat sheet
While competitor Norfolk Southern Corp. (NYSE:NSC) hasn’t reported yet, both Union Pacific Corporation (NYSE:UNP) and CSX have. Between these two companies, we find several interesting pieces of economic news. First and foremost, coal may be on the rebound. Each of the big three railroads have been reporting declines in coal volumes. These declines have been particularly damaging to both CSX and Norfolk Southern. However, in the last three months, CSX saw a decrease in coal shipments of 10%, which was only slightly worse than the 6% decline reported by Union Pacific.
In other areas, a concern for oil companies should be the significant decline in agricultural volumes. CSX saw a decline of 12% in agricultural volumes and Union Pacific Corporation (NYSE:UNP) reported a decline of 9%. CSX suggested this was related in part to a “reduction in gasoline demand.” On the flip side of this coin, demand for chemicals was up significantly, and ironically this was tied to, “crude, gas, and frac sand demand.” With CSX showing an 11% increase in chemicals volume, and Union Pacific reporting a 14% increase, it’s a good bet the natural gas industry will continue to do well.
CSX is improving with or without the economy’s help
Famed investor Peter Lynch once suggested, if you are hoping for the economy to drag your stock along, you should probably look elsewhere. He preferred to see the company taking steps to improve its business rather than relying on external forces. This leads us to the second reason to consider CSX Corporation (NYSE:CSX), their operating margin has improved almost a full percentage point since last year.
In fact, one reason I’ve favored Union Pacific in the past, was the company’s industry leading operating margin of 30.87%. However, CSX’s margin improved from 28.86% last year, to 29.58% this year. If CSX continues this improvement, they may challenge Union Pacific Corporation (NYSE:UNP) for the lead. In addition, CSX’s performance is now significantly better than Norfolk Southern Corp. (NYSE:NSC)’s operating margin of just 26.6%.
CSX is speedily improving
Two measures of the efficiency of a railroad are, the company’s dwell hours (how long cars sit idle), and their train velocity (how fast the trains move on average). Unfortunately, we don’t have Norfolk Southern to compare to because the company doesn’t normally report these numbers. However, between Union Pacific and CSX, this race is getting close.
On the one hand, Union Pacific’s train speed is still much better at 26.4 miles per hour versus 23.4 mph at CSX Corporation (NYSE:CSX). However, CSX’s train velocity increased from 22.3 mph last year to 23.4 mph this year, while Union Pacific’s train velocity stayed the same. This improved train speed is the third reason to consider CSX stock. Faster moving trains means the goods get to their destination more quickly. Higher efficiency is a hallmark of train service and a selling point for the railroad.
A fourth reason to look at CSX is the company’s industry-leading dwell hours. Union Pacific Corporation (NYSE:UNP) reported dwell hours over 27, and CSX reported dwell hours decreased from 24 to 22.2. In short, CSX’s cars are sitting around less. Given the company is moving its trains faster, the improvement in dwell hours means CSX is more closely matching car supply to demand.
It’s a close race
One way that CSX Corporation (NYSE:CSX) wins against its rivals is the stock is a relatively better value. Since all three major railroads pay dividends and have different growth rates, using a PEG ratio isn’t enough. I prefer to use the PEG+Y ratio, which compares each company’s yield plus growth rate versus their P/E ratio. With this measure, the higher the number the better.
CSX’s yield of 2.54% is just slightly less than Norfolk Southern at 2.69%. However, CSX is expected to grow earnings faster at 11.63% versus 10.69% at Norfolk Southern. Since both companies have similar forward P/E ratios, CSX scores a PEG+Y of 1.07 compared to a 1.0 at Norfolk Southern. While Union Pacific Corporation (NYSE:UNP) pays a lower yield, and is growing faster, the shares also reflect this with a higher P/E ratio. Primarily due to the company’s higher P/E ratio, Union Pacific has a PEG+Y of 1.03.
As you can see, CSX stock is relatively the best value. The company is seeing improvements in operating margin, train speed, dwell hours, and coal volumes. It’s still tough to beat Union Pacific’s performance, but CSX Corporation (NYSE:CSX) is closing this gap. If the company continues improving, we may crown a new king of the rails.
The article 5 Ways This Company Is Getting Back on Track originally appeared on Fool.com and is written by Chad Henage.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
