The trends at CSX Corporation’s business don’t look particularly good, but there is an argument that the stock makes up for it with its cheap pricing. Its trailing P/E is 12, and keep in mind that earnings per share were about flat last quarter even with revenue coming in lower. In addition to share repurchases, the company pays a 2.6% dividend yield to further demonstrate returning cash to shareholders. Analyst consensus for earnings in 2013 imply a forward P/E of 10, and we think that the business should be stable enough to justify a higher multiple than that.
Robert Bishop’s Impala Asset Management more than doubled the size of its position in CSX Corporation during the second quarter, with the fund reporting a total of 3 million shares in its portfolio at the end of June. This made it one of Impala’s 10 largest 13F positions (see more stock picks from Impala Asset Management). Valinor Asset Management, managed by David Gallo, also increased its stake and owned 2 million shares at the end of the quarter (research more stocks that Valinor owns). Adage Capital Management, run by former Harvard Management employees Phil Gross and Robert Atchinson, sold shares on net but still had 1.3 million shares (find stocks that Adage has been buying and selling).
Norfolk Southern Corp. (NYSE:NSC) and Union Pacific Corporation (NYSE:UNP) are two other large publicly traded U.S. railroads which therefore make good peers for CSX. Norfolk Southern is about the same size in terms of market cap, and its trailing and forward P/E multiples both come in at 11 so it is roughly even with CSX in terms of valuation on that basis. In the second quarter of the year its revenue was about flat but earnings were down 6%, worse than CSX seems to have done in the same quarter. We think both companies are about even from a value perspective. The larger Union Pacific- its market cap is about $60 billion- experienced substantial growth in both revenue and earnings in the second quarter versus a year earlier; however, it carries a small premium to these other two railroads at a trailing P/E of 16 and a forward P/E of 13, and its dividend yield is a bit lower. We think its higher pricing is about the right level for the degree to which it is a better-performing business.
We can also compare CSX to smaller railroads Kansas City Southern (NYSE:KSU) and Genesee & Wyoming Inc. (NYSE:GWR). Possibly because of their prospects as acquisitions, these companies are much higher priced: they trade at 19 and 17 times forward earnings estimates, respectively. They did both see double-digit earnings growth in the second quarter compared to the same period in the previous year, but revenue growth was considerably lower and we don’t think the bottom-line growth is sustainable. As smaller companies which are not particularly more attractive on a performance basis and which are more expensive, we don’t think they are as good values as the larger railroads. However, we would also avoid shorting them due to the possibility of acquisitions.
CSX looks like a good value stock after its earnings. However, other large railroads such as Norfolk Southern and Union Pacific seem like they may be just as good buys and investors should watch those companies’ quarterly reports as well.
