Concerns over the railroad worker unions strike have been around this year. While the economy is already battling record-high inflation, the Federal Reserve’s persistent hawkish stance, geopolitical tensions, and a potential recession, the nation’s freight rail companies and their workers’ union are yet to settle on a new contract after three years of negotiations.
The railway industry tends to benefit significantly during the holiday season. However, a potential industry-wide strike could hamper the industry’s growth and restrain holiday supplies. Rail workers must ratify the new contract to prevent a nationwide rail shutdown.
Despite the macroeconomic challenges, including crew shortages, railroad service provider CSX Corporation (CSX) reported strong fiscal third-quarter financials, topping analysts' expectations. Net income came in at $1.11 billion, while the consensus, as compiled by FactSet, was $1.06 billion. Earnings per share came in 52 cents from 43 cents a year earlier, surpassing Wall Street expectations of 49 cents per share.
During the quarter, CSX paid a whopping $42 million charge because of the railway worker union strike negotiation that included 24% raises and $5,000 in bonuses that cost more than the company expected.
CSX shares have slumped 17.9% year-to-date. However, the stock has gained 8.7% over the past month to close the last trading session at $30.88.
Here is what could shape CSX’s performance in the near term:
Stable Dividend Growth
On October 6, the company’s Board of Directors approved a $0.10 per share quarterly dividend payable on December 15, 2022. It pays a $0.40 per share dividend annually, which translates to a 1.30% yield on the current share price. Its four-year dividend yield is 1.25%.
The company’s dividend payouts have grown at a CAGR of 7.9% over the past three years and 9.2% over the past five years. The company has a record of 17 consecutive years of dividend growth.
Mixed Financials
For the fiscal 2022 third quarter ended September 30, 2022, CSX’s revenue increased 18.3% year-over-year to $3.90 billion. The company’s operating income grew 10% from the prior-year period to $1.58 billion. Moreover, CSX’s net cash provided by operating activities rose 11.4% from the prior-year quarter to $4.26 billion.
However, the company’s total expenses rose 24.8% year-over-year for the quarter, with its labor and fringe expenses increasing 20.3% year-over-year. Its interest expenses grew 9% from its prior-year quarter to $193 million for the quarter.
Mixed Analyst Estimates
Analysts expect CSX’s revenue for the fiscal fourth quarter ending December to come in at $3.77 billion, indicating an increase of 10.1% from the prior-year quarter. The company’s EPS for the same quarter increased 14.5% year-over-year to $0.48. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
On the other side, its revenue estimate of $3.73 billion for the fiscal second quarter ending June 2023 indicates a decline of 2.3% year-over-year. Similarly, its EPS estimate of $0.50 for the same quarter indicates a 1.6% decrease compared to its prior-year quarter.
Robust Profitability
CSX’s trailing-12-month gross profit margin of 49.99% is 71.8% higher than the 29.09% industry average. Its trailing-12-month EBIT margin of 39.90% is 310.1% higher than the 9.73% industry average. Also, its trailing-12-month net income margin of 28.05% is 316.34% higher than the industry average of 6.74%.
Further, CSX’s trailing-12-month levered FCF margin of 19.56% is 480.91% higher than the industry average of 3.51%. Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 31.34%, 11.90%, and 9.66% compare to the industry averages of 14.19%, 6.83%, and 5.31%, respectively.
Premium Valuation
In terms of forward EV/Sales, CSX is trading at 5.49x, 229% higher than the industry average of 1.67x. The stock’s forward Price/Sales multiple of 4.44 is 242% higher than the industry average of 1.30. Moreover, in terms of its forward Price/Book, it is trading at 5.45x, 105.5% higher than the industry average of 2.65.
POWR Ratings Reflect Uncertainty
CSX has an overall rating of C, translating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CSX has a B grade for Quality, consistent with its high profitability.
However, it has a Value grade of D, in sync with its higher-than-industry valuation.
CSX is ranked #6 out of 16 stocks in the B-rated Railroads industry.
In addition to the POWR Ratings stated above, we have also given CSX grades for Growth, Momentum, and Stability. Get access to all CSX ratings here.
Bottom Line
The company’s impressive dividend-paying record makes CSX attractive to dividend investors. However, the macroeconomic and industry headwinds make its near-term prospects look uncertain. Therefore, I think investors should wait for a better entry point in the stock.
How Does CSX Corporation (CSX) Stack up Against Its Peers?
While CSX has an overall POWR Rating of C, one might consider looking at its industry peers, ComfortDelGro Corporation Limited (CDGLY), Wabtec (WAB), and Canadian National Railway Co. (CNI), which have an overall B (Buy) rating.
CSX shares were trading at $31.27 per share on Monday afternoon, up $0.39 (+1.26%). Year-to-date, CSX has declined -16.07%, versus a -15.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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