Has CSX Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if CSX (NYSE: CSX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at CSX.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.2% Fail
  1-Year Revenue Growth > 12% 10.4% Fail
Margins Gross Margin > 35% 37.4% Pass
  Net Margin > 15% 15.5% Pass
Balance Sheet Debt to Equity < 50% 109.1% Fail
  Current Ratio > 1.3 1.09 Fail
Opportunities Return on Equity > 15% 21.2% Pass
Valuation Normalized P/E < 20 13.32 Pass
Dividends Current Yield > 2% 2.2% Pass
  5-Year Dividend Growth > 10% 32.4% Pass
       
  Total Score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at CSX last year, the company has picked up a point. Improving net margins and a much higher dividend yield account for the rise, although slowing revenue growth shows that the railroad company still has some work to do.

Railroad companies in general have benefited from the increase in oil prices. As transportation alternatives like trucking and air travel see their costs rise, the fuel efficiency of rail transport becomes an increasingly important factor. While competitor Union Pacific (NYSE: UNP  ) has had great success focusing on the western part of the U.S., CSX has seen similar opportunity operating largely east of the Mississippi.

CSX in particular has tied itself increasingly to the fortunes of the coal industry. That's raised some concerns as low natural gas prices have hurt coal demand, depressing shares of Alpha Natural Resources (NYSE: ANR  ) and James River Coal (Nasdaq: JRCC  ) , both of which use CSX to transport their coal.

But another growth area where CSX and rival Norfolk Southern (NYSE: NSC  ) are cashing in is in providing natural-gas drillers with the raw materials and equipment they need for their production. CSX shipped 40% more hydraulic fracturing sand in 2011 from the year before, and shipments of pipe and other drilling equipment have also been on the rise and could continue if the energy boom keeps picking up steam. Metals shipments have also risen recently, further offsetting losses from weaker coal shipments.

To keep improving, CSX needs to keep focusing on diversification of its mix of clients and take advantage of the competitive advantages that railroads have right now.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

CSX isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add CSX to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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