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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers