CSX has had an impressive run over the past six months as its shares have beaten the S&P 500 by 14.9%. The stock now trades at $42.45, marking a 17.5% gain. This run-up might have investors contemplating their next move.
Is there a buying opportunity in CSX, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think CSX Will Underperform?
We’re happy investors have made money, but we're swiping left on CSX for now. Here are three reasons you should be careful with CSX and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, CSX’s 5.9% annualized revenue growth over the last five years was tepid. This was below our standard for the industrials sector.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
CSX’s unimpressive 6.1% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, CSX’s margin dropped by 18 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. CSX’s free cash flow margin for the trailing 12 months was 12.7%.
Final Judgment
CSX doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 22.9× forward P/E (or $42.45 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward our favorite semiconductor picks and shovels play.
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