Better Buy: CSX Corp. or Norfolk Southern Corp.?

Image source: Norfolk Southern.

Both CSX (CSX -0.57%) and Norfolk Southern (NSC -0.07%) have endured challenging conditions in the railroad industry lately. Even though falling energy prices have cut fuel costs substantially, CSX and Norfolk Southern have had to deal with immense declines in coal shipment volumes that have transformed their respective businesses. Looking forward, fears of an economic slowdown could further weigh on the railroads, but industry bulls believe that better times could lie ahead. Let's compare Norfolk Southern and CSX on several key metrics to see which looks more attractive currently.

Valuation
Both Norfolk Southern and CSX have suffered share-price declines of roughly equal magnitude. CSX is down 34% over the past year, compared to Norfolk Southern's 29% drop.

When you compare each stock's price to its recent earnings, CSX looks slightly cheaper. Based on their results over the past 12 months, CSX currently trades at a trailing earnings multiple of about 11. That compares to nearly 13 times earnings for Norfolk Southern stock.

Moreover, growth prospects don't explain away the difference. Neither stock expects to see considerable earnings growth over the next year, and so using forward earnings measures, the multiples of 11 for CSX and 13 for Norfolk Southern stay relatively unchanged. If anything, analysts expect slightly more from CSX, and that gives it a slightly advantage over railroad rival Norfolk Southern.

Dividends
For dividend investors, both CSX and Norfolk Southern look attractive. Norfolk Southern pays a yield of about 3.3% based on current stock prices. That's almost identical to the 3.2% dividend yield that CSX currently sports.

Historically, both companies have done a good job of steadily raising their dividends over time. Over the past five years, Norfolk Southern has boosted its payout eight different times, increasing its quarterly dividend by 64%. CSX has countered with five dividend increases of its own, and its quarterly payout has more than doubled over that time frame. Based on their current outlook and history, Norfolk Southern and CSX don't show enough difference to declare a clear winner on the dividend front.

Growth
Growth has been a hard thing for railroads to find lately, and recent results from both railroads show some of the challenges that they've faced. In its most recent earnings report from earlier this month, CSX suffered a 13% decline in revenue, and that contributed to a 5% drop in net earnings. Lower revenues from fuel surcharges were largely to blame for the top-line weakness, and a 6% drop in overall volume showed some of the pressures on the business from tremors in the U.S. economy. Commodity businesses like coal and industrial metals were the primary culprits in the volume decline, offsetting higher volume from automotive shipments. Looking ahead, the company said that its earnings would likely fall in 2016.

Meanwhile, Norfolk Southern will report its fourth-quarter results later this month, but its results from the previous quarter mirrored much of what CSX has seen. Norfolk Southern's third-quarter performance featured a 10% drop in sales and a 19% decline in net income, and the railroad projected that the fourth quarter would continue to see many of the same pressures on its overall performance. Norfolk Southern has worked hard on restructuring efforts designed to cut costs and adapt to the decreasing importance of the coal industry to its overall results, but the moves will take time to implement fully. Moreover, hopes for stabilization in the global economy more broadly appear to be increasingly unlikely to come to pass.

Neither CSX nor Norfolk Southern has a huge edge in terms of growth prospects. If conditions improve, then both will likely benefit to a similar extent.

The railroad industry has gone through a lot of turmoil over the past year, and both CSX and Norfolk Southern have had to find ways to deal with the disruptions that have occurred in their respective businesses. Both companies have a strategy in place to reach a brighter future, but CSX looks like it might have a slight edge in giving shareholders a greater opportunity to profit from an eventual turnaround.