Summary
- CSX shares are down double digits in a post-earnings sell-off.
- Yet, this weakness is coming after a quarter where the company set multiple records related to operating income and cash flows.
- Management issued negative 1-2% top-line guidance for the year, but to me, that doesn't justify an 10%+ sell-off.
- This idea was discussed in more depth with members of my private investing community, The Dividend Growth Club . Start your free trial today »
It’s been a while since I’ve owned a railroad. These companies really shot up in price and value a few years ago during the initial Trump Rally post-election. Ever since, I’ve viewed them as overvalued. Admittedly, I worry about putting capital into cyclical companies like the railroads so late into an expansion cycle because this industry is really economically sensitive and saw outsized volatility during the Great Recession. I don’t have a working crystal ball and while I suspect that we’re closing in on the end of this current bull market run (currently, it’s the longest expansion that we’ve seen in more than 50 years), I’m perfectly happy to focus on single stock valuation rather than buy into the macro news cycle and broader market fears. I believe that a well diversified DGI portfolio should make room for a railroad or two. Being that I don’t currently own any, this post-earnings sell-off in CSX (CSX) caught my eye.
As I write this, CSX shares are down more than 11%. It’s extraordinarily rare to see this company experience such volatility. If CSX closes trading today near the current lows, it will be the worst day it had experienced since the early 2000’s. When I see high quality, generally low volatility companies like this trade down double digits, I generally suspect that its an irrational reaction by the market. Although I can’t be certain without the benefit of hindsight, buying into this fear has proven to be an easy way to make money in the markets on many occasions and I wouldn’t be surprised if that ends up being the case here as well.
It’s interesting to see this double digit weakness when the quarter was a record setter, in many respects. During the quarter, CSX set record results in the operating income, free cash flow, and operational efficiency with regard to an all-time low operating ratio for the company’s U.S. Class 1 railroad. When I see headlines like this, I expect to see a rally, not a sell-off.
CSX’s Q2 EPS increased 7% y/y, from $1.01 to $1.08. The Q2 operating ratio improved by 120 bps to 57.4%. Honestly, after the massive EPS growth that CSX has produced in recent years (27% in 2017 and 67% in 2018), any positive y/y comps coming off of those numbers are going to look impressive to me. When I see big EPS jumps like that I worry that they aren’t going to be sustainable, but it appears that CSX’s bottom-line numbers are still trending higher.
Source: CSX Q2 CC Slides, Slide 5
However, it appears that analyst expectations were just too high for CSX and although the company set records in many bottom-line based segments, the top-line disappointment was too much to overcome.
