The $25 billion market cap railroad CSX (CSX) is up 20% year to date, outperforming broader market indices. It primarily operates in the eastern half of the U.S. as well as small portions of Canada.
The company's 10-K for 2012 shows that revenue was flat compared to 2011, after that year had shown a 10% increase on the top line from 2010 levels.
Costs were cut slightly last year, but earnings were still more or less unchanged for CSX. Business did seem off just a bit in the fourth quarter. However, between the light increase in net income and buybacks from the company, CSX reported earnings per share of $1.79 -- up from $1.67 in 2011 and $1.35 in 2010.
The current stock price near $24.30 therefore represents a trailing earnings multiple of 14. At that level we think that the company would have to deliver earnings growth over the next several years, but repurchases could augment any effects of stronger business.
When we look at CSX's 2012 cash flow statement we see $2.9 billion from operating activities; $2.3 billion of that was used on capital expenditures, with about $700 million used in buybacks. CSX also pays a dividend yield of 2.3%, which it funded last year by issuing long term debt on net.
We'd also note that considerably less cash was used on buybacks than in 2011 or 2010, though dividend payments have been increased. Analysts' 2014 expectations imply a forward price-to-earnings ratio of 12, so not much improvement in earnings per share is expected over the next two years.
Renaissance Technologies, whose founder Jim Simons is now a billionaire, initiated a position of 3.7 million shares in CSX in the fourth quarter of 2012. Billionaire Israel Englander's Millennium Management was also buying the stock, increasing its stake in the company between October and December to a total of 1.6 million shares. Large hedge fund D.E. Shaw reported a position of 1.5 million shares in its own 13F; that fund is named after billionaire founder David Shaw.
Norfolk Southern trades about even with CSX in terms of its trailing P/E, but that company reported a 14% decline in net income in its last quarterly report compared to a year earlier. Revenue fell slightly, and so we don't think that Norfolk Southern makes for a good value prospect at this time.
Union Pacific, the largest publicly traded U.S. railroad by market cap at $66 billion, did see growth on both top and bottom lines over the same time frame that Norfolk Southern and CSX both struggled. The market has seized on the company's larger size and somewhat stronger recent performance however, and as a result there is at least something of a premium considering the trailing earnings multiple of 17.
We can also compare CSX to Kansas City Southern (KSU) and to Genesee & Wyoming (GWR). The valuations here are higher (we think that this might possibly due to the potential for Berkshire Hathaway's Burlington Northern Santa Fe to be an acquirer if prices get cheap enough): even in terms of forward earnings estimates, the P/Es here are 21 and 17 respectively.
In addition, earnings have been down at both companies; at Genesee & Wyoming, in fact, earnings were down 60% in the fourth quarter of 2012 versus a year earlier. Given the higher pricing of these stocks and the fact that their businesses are not doing particularly well compared to their larger peers, we would avoid them.
CSX might actually be one of the better railroad stocks (at least out of those in the U.S.). It appears to have the lowest earnings multiples of its peers with the exception of Norfolk Southern, and that company has been doing worse recently than CSX. If we were going to play in the industry we think that we would wait for CSX's next earnings release, however, since the fourth quarter numbers were weak and the current valuation does require some future earnings growth in order for the stock to be a buy.
-- Written by Matt Doiron