CSX Corporation Beats Estimates, but Still Looks Expensive

It's not the winter weather that has one Fool worried about CSX stock -- it's the valuation.

Apr 16, 2014 at 10:45AM

CSX Corporation (NASDAQ:CSX) reported its fiscal-first-quarter 2014 earnings after market close on Tuesday. The bad news is that earnings declined year over year. The good news is that earnings didn't decline quite as much as investors had expected. For Q1 2014, CSX reported:

  • 2% growth in revenues to $3 billion, on a 3% uptick in volume
  • 16% falloff in operating profits
  • 11% decline in per-share profits to $0.40 (analysts, however, had predicted just $0.37 in profit)
  • weakening free cash flow, as last year's $240 million in Q1 2013 cash profits shrank and were cut nearly in half (to $124 million) in Q1 2014

None of these numbers looks particularly strong -- not that we expected to see really strong results, especially after fellow transport company J.B. Hunt (NASDAQ:JBHT) set the tone for transports yesterday, complaining about how harsh winter weather affected its results. Yet after declining during ordinary trading hours, CSX shares perked up after its earnings news was released once trading had ended, recovering their earlier losses and even gaining a few pennies. Why?

Probably key to the shares' after-hours strength was management's insistence that despite profits declining in Q1, CSX still believes that it will grow earnings in 2014. To be clear, management predicts it will not just recover from Q1's disappointment to grow earnings in the remaining three quarters of the year but will actually grow full-year 2014 profits to levels "modestly" better than CSX achieved in fiscal 2013. What's more, management promised to continue to grow profits farther out and to sustain "double-digit earnings growth and margin expansion for its shareholders in 2015 and beyond."

That's a pretty bold claim given that most analysts who follow CSX predict it will lag the rest of its industry in profit growth over the next five years and struggle to achieve even 10% earnings growth over the long term.

Problem is, with a price-to-earnings ratio of more than 15 today, CSX really does need to return to and maintain mid-teens earnings growth to justify its stock's valuation. And even then, the stock may be no great value. Due to high capital investment requirements, CSX's real free cash flow has historically lagged its reported GAAP income significantly -- with cash profits often being only mere fractions of reported net income.

Foolish takeaway
Management's reassurances of a return to double-digit earnings growth notwithstanding, poor performance in Q1 2014 and historically weak free cash flow across many years tell me that CSX stock is probably not a very high-quality investment. There are better places for your money. 

And speaking of better places...
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of CSX. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers